Watchdog criticises PwC and Denison over BHS auditing
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A report into the role of the retailer BHS’s auditor, PwC, has said that accounts were misleading and featured unrealistic forecasts before it was sold.
The Financial Reporting Council (FRC) has published the ‘facts and acts of misconduct’ document into the auditing process which earlier this year saw PwC and Leeds-based auditor Stave Denison receive record fines for failings related to its audit of collapsed retailer BHS.
Denison, who was senior partner of PwC’s northern region, was fined £500,000 and agreed not to perform any audit work for 15 years.
The report states: “The disclosures in the financial statements of BHS Group and BHS were incomplete, inaccurate and misleading because the financial statements for BHS Group stated that the going concern assumption was appropriate “as Taveta Investments No. 2 Limited… has given an undertaking to provide the Company with continuing financial support”.”
In fact, the backing of Taveta – BHS’s then owner – only applied while it owned BHS. When the audit was signed in March 2015, BHS was days away from being sold for £1.
The FRC said: “The respondents [PwC and Denison] gave no consideration to how these matters may have impacted BHS’ ability to continue as a going concern. 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 FRC said PwC and Denison failed to test assumptions made by the management of Taveta about BHS. The assumptions included an estimate that BHS’s like-for-like sales would rise 6.7% in 2015 – even though its retail sales had fallen 2.6% between 2012 and 2014. BHS management assumed the chain’s annual loss would shrink by £30m in 2015 from £69m the previous year as margins expanded and sales rose.
“Such margin and sales growth were unsupported by audit evidence and should have appeared to the respondents to be unrealistic and require further investigation,” the FRC said.
Taveta sold BHS for £1 in March 2015, two days after PwC signed off BHS’s accounts. The chain collapsed in April 2016 with the loss of 11,000 jobs.