PwC failed to flag BHS risks ahead of retailer’s collapse, says regulator
Financial Reporting Council fines PwC a record £6.5m and former partner Stephen Denison £325,000, as well as banning him from auditing for 15 years
London — PwC should have flagged significant doubts over the future of BHS in an audit that was completed just days before the loss-making UK retailer was sold for a token £1 in 2015, ahead of its collapse a year later, a regulator said on Wednesday.
BHS had 163 stores and employed 11,000 people when it collapsed in 2016, triggering a political firestorm.
The Financial Reporting Council (FRC) watchdog fined PwC in June a record £6.5m ($8.3m), and former partner Stephen Denison £325,000. Denison was also banned from auditing for 15 years.
After pressure from legislators, the Financial Reporting Council published documents on Wednesday detailing the eight allegations of misconduct that prompted the penalties.
PwC said on Wednesday it was sorry its work fell well below the professional standards expected. "This is unacceptable and we agreed the settlement recognising that it is important to learn the necessary lessons," it said in a statement.
PwC is one of the world’s top four auditors, along with KPMG, Deloitte and EY, which check the books of most blue-chip companies across the globe.
They are coming under intense scrutiny in Britain over how they failed to spot company collapses and for juggling audits and more lucrative nonaudit work for the same clients.
MPs have said they may formally request higher fines once the FRC published the details of its probe into PwC. They called the FRC "toothless" over its handling of the BHS audit, and the watchdog’s powers are being independently reviewed. The documents are likely to spark fresh calls for the audit and nonaudit operations of the big audit firms to be split up.
At the core of an audit, accountants are required to say if they think a company is a "going concern", meaning it can stay in business for the foreseeable future. The FRC looked at the audit of Taveta Group, which includes BHS, for the year ending August 30 2014.
"There were several events or conditions that should have appeared to the respondents (PwC and Denison) to cast significant doubt over BHS’s ability to continue as a going concern and therefore to require further investigation," the FRC said.
BHS had significant net liabilities, had had to make provision for loss-making stores, and had very significant deficits in its defined-benefit pension schemes. In a letter dated just before Denison signed off on the accounts, Taveta qualified its support for BHS, saying it would continue as long as it was part of the group. Taveta had also submitted a draft application to restructure its pension scheme — an indicator of potential insolvency, though this was "paused" in September 2014.
"The respondents gave no consideration to how these matters may have impacted BHS’s ability to continue as a going concern," the FRC said.
"They failed to gather any audit evidence on which to conclude that the going concern assumption was appropriate. Based on the audit evidence obtained, they should have concluded that a material uncertainty existed about BHS Group and BHS’s ability to continue as going concerns."
The financial statements were misleading as they said a going concern assumption was appropriate because Taveta had given an unqualified undertaking to support BHS, the FRC said.
Billionaire retailer Philip Green, who had no comment on Wednesday, sold BHS for £1.
PwC and Denison became aware of the likely sale of BHS during the audit, and completion of the accounts was brought forward to accommodate it, the FRC said. Denison signed off on the accounts on March 9 2015, but backdated them to March 6. He recorded only two hours on the audit, despite being the lead partner, leaving the bulk of the work to juniors, one of which had just a year’s post-qualification experience, the FRC said.
The lack of supervision by Denison was striking, given that he recorded 31 hours on non-audit services for the same clients in this period, the watchdog said.
PwC said on Wednesday it had taken steps to bolster supervision of audits and had agreed with the FRC to extend these further for an additional period.
"While the failings did not contribute to the collapse of BHS over one year later, they were serious and this is reflected in the Financial Reporting Council settlement," PwC said.
Accounting firms are required to ensure there is no conflict of interest when conducting audit and non-audit work for the same customer.
But the FRC said PwC and Denison failed to guard against the "self-interest threat" created by the substantial fees they generated in providing non-audit services to the Taveta Group.
This situation threatened the objectivity of the auditing, and PwC should have considered a complete separation of teams who handle the audit and non-audit work, the FRC said.