FRC mulls formal investigation of PwC for WHSmith role

After an accounting error wiped £30 million from WHSmith’s expected annual trading profit in North America, an independent report by Deloitte has found that the retailer now faces a larger-than-expected hit to its finances. In the fallout, reports in the British press suggest the Financial Reporting Council is considering an investigation into the brand’s auditor, PwC.

WH Smith is one of the most famous names in British travel retail – operating a recognisable chain of railway station, airport, port, hospital and motorway service station shops – selling books, stationery, magazines, newspapers, entertainment products and confectionery.

For 65 years, the firm was audited by Deloitte – but the changing of audit rotation rules led to a changing of the guard in the 2010s. PwC was installed as external auditor for WH Smiths – with its contract most recently renewed in 2023, running up to and including the end of its current financial year.

WH Smith has had to return to its old Big Four auditor for help just as that period draws to a close, however, amid the emergence of a major accounting blunder. Analysts have since reported "huge embarrassment" for the retailer, with its group having overstated expected trading profit for North America of £55 million – now reduced to £25 million for the financial year ending on August 31st.

Following Deloitte’s independent investigation into the matter, the firm has concluded that WHSmith’s sales had been overstated, with the mistakes made over several years. As reported by the Financial Times, the issues centred around the way WHSmith recognised payments from suppliers when they ran promotions. While such income is usually recorded gradually over time to align with when the related products are sold, Deloitte found that WHSmith had recorded the income when deals were agreed.

This move to report income earlier than cash had been received, suggested US profits were higher than they were. The Financial Times also said that people familiar with the story had alleged this allowed senior managers to financially benefit, by hitting bonus performance targets. But following the revelations of the accounting errors, Deloitte added that this would now result in a larger-than-expected hit to the retailer’s profits.

WHSmith is now expected to have to restate full-year earnings for 2023 and 2024. It had already further cut forecasts for trading profit in its US business from a reduced guidance of £25 million – rolled out in August – to £5 million-£15 million for 2025.

Looking ahead, the UK accounting watchdog, the Financial Reporting Council (FRC), is considering formally investigating PwC’s auditing of WHSmith. While the FRC has not decided whether to open a formal probe into PwC’s work at WHSmith, it regularly reviews situations where companies reveal problems with their accounts to determine whether to open a formal investigation.

PwC and WHSmith have not yet released comment on the matter.