The Financial Reporting Council (FRC) - the body that regulates auditors - has today issued its highest ever fine, to PWC for its 2014 audit of Taveta Group. That audit, presented two months earlier than previous years, endorsed the company directors’ assessment and signed off BHS as a “going concern”, enabling it to be sold to Dominic Chappell’s RAL group for £1 just six days later.
In March this year the Insolvency Service announced it had initiated proceedings to bar Dominic Chappell and three of his colleagues from being company directors, based on their conduct managing BHS for the one year they owned it before it collapsed into insolvency.
PWC were paid £355,000 for the 2014 audit of Taveta group: the £10 million fine (reduced to £6.5 million if paid early) is 28 times that, and the PWC partner responsible has been barred from audit work for 15 years. The Committee is today writing to FRC (attached) with questions on the nature of the offence that garnered such an unprecedented financial penalty – for which there is no explanation - and whether, given that, they will now proceed to wider investigation of PWC’s audits of the Taveta group accounts. There are also questions – again – over potential conflicts of interest in PWC’s work across the group.
Rt Hon Frank Field MP, Chair of the Committee, said:
“This is undoubtedly a good first move. It reopens the key question of whether BHS was in fact a ‘going concern’ when it was jettisoned for £1. For that, the company directors as well as the auditors are on the hook. As we know, that sale – which came just six days after PwC signed off the books – threw 11,000 people out of work and permanently reduced the pensions of 20,000 people. The Committee is now pressing FRC on whether further investigations, and wider and stronger sanctions, are called for.
“On the basis of their reply, the Select Committee may request the right to appeal to the FRC to significantly increase the fines, putting them in the vanguard of necessary reforms.”
The Committee’s 2016 report on the sale of BHS included evidence from Steve Denision, the PWC partner in charge of the Taveta audit who has now been barred from audit work for 15 years. The report concluded:
84. BHS Group’s 2012–13 and 2013–14 Annual report and accounts made clear that the company was a ‘going concern’ on the basis of financial support provided by the wider Taveta Group. This alone meant that it could trade without threat of liquidation for at least the next 12 months.198 The 2013–14 Annual report and accounts were signed off on 6 March 2015, just days before the sale of BHS to RAL and while the key substance of the deal was still being negotiated. This is also notable because the accounts were normally signed off in May of each year. The accounts were audited by PricewaterhouseCoopers (PwC), who have a long-standing relationship with Sir Philip Green and have provided auditing services to Taveta for over a decade. Since 2008, the same PwC partner, Steve Denison, has been responsible for auditing the accounts of Taveta and its subsidiaries.
85. Despite being aware that BHS was due to be sold imminently and, in such a situation would lose the ongoing support from Taveta, PwC did not dispute BHS’s Directors’ assessment that the business remained a going concern. While Mr Denison told us that PwC recognised that BHS would potentially lose the ongoing support of Taveta if it was sold, they also considered “to what extent would such a deal bring additional cash, assets and resources to BHS to allow it to continue to trade in the future”.
86. Given that Grant Thornton’s own due diligence of BHS had identified a number of significant risks to BHS meeting its cash flow requirements, we were surprised that PwC did not more deeply question whether BHS was genuinely being sold as a going concern. In light of this, we welcome the Financial Reporting Council (FRC) investigation into the conduct of PwC with regards to its audit of BHS’s accounts in the year ending August 2014, and continue to urge them to conclude this as swiftly as possible and to include PwC’s work in previous years and on the accounts of other Taveta Group companies. We sincerely hope that the FRC can report significantly quicker than the “two years” in which they currently “aim” to conclude their investigations.
Mr Denison gave evidence in Parliament on 23 May 2016. In answer to a the question of why he had signed off BHS as a “going concern”, he said: “I guess there were two considerations in relation to going concern. One was that, at the time the accounts were signed, no deal had been done, so in the event that a deal did not happen, then financial support would continue to be available from the Taveta group, as it had been in previous years. There is written confirmation of that from the parent company. In the event that a deal did happen, that financial support would fall away, so the factors that were brought to bear at that time were: to what extent would such a deal bring additional cash, assets and resources to BHS to allow it to continue to trade in the future.”
In fact, in respect of the “deal” that went through 6 days after that audit, the Committee concluded that “Sir Philip chose to rush through the offloading of a beleaguered high street institution, losing money and encumbered with a massive pension fund deficit, to a buyer who he was clearly aware was "manifestly unsuitable", with Sir Philip forced to finance the sale himself”.
PWC audited Taveta and its subsidiaries from 2003, including BHS from 2009 when it came into the Taveta group until the point at which it was sold. Since 2010 they have been paid £5.4 million specifically for pension advice to the group – with the highest amounts in 2014 and 2015. In total for audit and non-audit services, PWC were paid: