Accounting watchdog launches probe into Eddie Stobart Logistics audits

The accounting regulator has begun two investigations into KPMG and PwC over their audits of Warrington-based Eddie Stobart Logistics.

Both investigations will be carried out by the Financial Reporting Council’s (FRC) enforcement division, under the Audit Enforcement Procedure.

They relate to audits for the years ended 30 November 2017 (KPMG) and 30 November 2018 (PwC).

KPMG issued a statement, saying: “We note the announcement from the FRC regarding commencement of an investigation into the audit of Eddie Stobart Logistics plc for the year ended 30 November 2017.

“We will cooperate fully with the FRC to conclude this matter as quickly as possible.”

In a statement, PwC said: “We will cooperate fully with the FRC in this investigation. We are committed to delivering consistently high quality audits and in June 2019 we introduced a major ongoing programme to enhance audit quality across the firm.”

On August 23, 2019, Eddie Stobart announced the immediate replacement of chief executive Alex Laffey by Sebastien Desreumaux, as well as the suspension of its shares on AIM and that its interim results announcement due the following week would be delayed.

It also warned that its adjusted earnings before interest and tax would be “significantly lower” than antipated.

In a statement to the stock exchange, the logistics group said: “As part of the group’s review carried out in conjunction with the group’s auditors in relation to the interim results, the board is applying a more prudent approach to revenue recognition, re-assessing the recoverability of certain receivables, as well as considering the appropriateness of certain provisions.

“While revenue expectations for the first half are broadly in line with previous guidance, the full impact of these items on adjusted EBIT is unclear, but it is likely to be significantly lower than anticipated at the time of the half year trading update on 9 July 2019.”

In response, Russ Mould, investment director at Manchester investment platform AJ Bell, said: “The company references a need to make changes to revenue recognition, receivables and provisions in a statement which roughly translates as ‘we were at best too aggressive with our accounting’.

“These developments, and an earlier admission that 2018 profit had been overstated by £2m, follow the appointment of new finance chief Anoop Kangits. This at least suggests the company’s financial controls might have more rigour going forward.”

Just over two weeks later, the company revealed that its third largest shareholder, DBAY Advisors Limited, had expressed an interest in buying the business.

This resulted in a rescue deal for the business on December 6, when shareholders voted “overwhelmingly” to accept the proposal by Isle of Man-based DBay Advisors, which meant the group, and its 6,500-strong workforce, had been saved from collapsing into administration.

DBay agreed to inject approximately £55m of new financing into the group’s operations.

In February this year, Eddie Stobart Logistics finally published its interim results and revealed that the board had identified a number of accounting-related matters which had significantly impacted the results and also resulted in restatements of the company’s consolidated audited financial results for 2018 and prior years.

Half year revenues for the six months to May 31, 2019, were £421.3m, compared with £334.5m, restated, in the same period in 2018.

The group made a £199.842m pre-tax loss in the six months, against a £15.117m pre-tax loss in restated figures for the previous year.