The regulator has been under attack for its failure to publish details of its settlement agreement from members of the joint work and pensions and business, energy and industrial strategy (BEIS) select committee, which launched an inquiry into BHS’s collapse just a year after its sale as a going concern. The chain had by that time accumulated a £571m pension deficit.

The FRC investigation relating to the 2014 audits of BHS and the Taveta Group resulted in a £10m fine for PwC, reduced to £6.5m on settlement, and a £325,000 fine for audit partner Steve Denison (discounted from £500,000).

In its settlement agreement, the regulator pointed out that information about the likely sale of BHS emerged during the course of the audit, resulting in the completion date being brought forward, so the firm and Denison should have been aware that BHS’s financial statements were likely to be subject to increased scrutiny.

In December 2014, Denison recorded one hour on the audit, followed by three hours during the period 1 January 2015 to 9 March 2015 prior to sign off.  Work was delegated to a junior team member who had only one year of post-qualification experience and who told the inquiry she was not aware that BHS was being sold.

The FRC said indicated Denison and another senior member of the team failed to supervise the audit sufficiently, which the regulator said was ‘striking’, given that they both recorded substantial amounts of time on non-audit services for the same clients in the period from 1 January 2015 to 9 March 2015. Whilst Denison recorded 31 hours on non-audit services in this period, he recorded just two hours on the BHS audit.

As well as inadequate reviews of the accounting information, the FRC said PwC and Denison were exposed to threats to their independence and objectivity and failed to guard against them. These threats included the size of non-audit fees from work for the same client, and familiarity with the company, both of which presented risks which were not appropriately handled.

The FRC said a number of factors, including the size of the pension deficit and ongoing losses in the companies, should have been analysed with regard to whether BHS was a going concern.

The report noted: ‘The respondents 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.’ 

It is also heavily critical of the way in which PwC assessed levels of impairment of fixed assets and revenue and of the assumption that Taveta Group would continue to support BHS, even though Taveta had supplied a letter qualifying this support by stating it was on offer ‘whilst the companies continued to be under the control of Taveta 2’.

The report stated: ‘The disclosures in the financial statements of BHS Group and BHS Limited 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”.’

The FRC highlighted a lack of challenge of key management assumptions, including the future prospects for BHS.

The report said: ‘The respondents failed adequately to understand, and to test, management’s “breakeven assumption”. The BHS brand was forecast to make a loss of £34.6m in year 7 but break-even in year 8. This assumption was unsupported by audit evidence.

‘It was also inconsistent with FRS 11 paragraph 36 (viz cash flows for the period beyond that covered by formal budgets and plans should assume a steady or declining growth rate). The assumption should have appeared to the respondents to be unreasonable and require further investigation.’

In a statement PwC said: ‘We are sorry that our work fell well below the professional standards expected of us and that we demand of ourselves. This is unacceptable and we agreed the settlement recognising that it is important to learn the necessary lessons.

‘Our audit methodology was not followed in this instance. We have taken steps to bolster the supervision and review of our audits. We took swift action to enhance our support and monitoring procedures. We have agreed with the FRC to extend these further for an additional period.

‘Whilst 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.

‘We are confident that this incident is not representative of PwC’s high quality work, which our thousands of dedicated and professional people are rigorously trained to deliver. At PwC we take our responsibilities extremely seriously and expect our people to adhere to our values and to professional standards.’

BHS particulars of fact and acts of misconduct is here

Report by Pat Sweet