Sir John Kingman:
Financial Reporting Council:
Committee Chair Frank Field will meet Sarah Albon, Chief Executive of the Insolvency Service, later this month to obtain “further details” in private of its investigations around the collapse of BHS.
A litany of failures
In June this year, details emerged of the unprecedented £6.5 million fine levied by the FRC against Big 4 auditor PWC for its 2014 audit of Sir Philip Green’s Taveta Group accounts.
The accounts, including those for BHS, were signed off two months earlier than in previous years, and five days before the now infamous £1 sale as a “going concern” to Dominic Chappell’s RAL group: MPs catalogue litany of failures culminating in 'at any cost' disposal of company and pension deficit to an wholly unsuitable "chancer". The high street icon crashed into insolvency a year later.
Sir Philip Green sought a high court injunction on the FRC’s report on PWC, “pending judicial review” of its findings. The judicial review was never heard and the injunction denied, but after taking extensive advice in a precedent setting case the FRC published an edited version of its “Particulars of Fact and Misconduct”.
Taveta Group’s counsel had sought to supress what it called the FRC’s “serious criticisms of [Taveta], its directors and its employees” publication of which could “give rise to serious and potentially irreparable harm to the Claimant and its directors and employees”. They went on to describe the audit regulator’s “sustained assault” on “the approach taken by management in preparing BHS’ 2014 financial statements”, publication of which would have “a very real potential to damage the reputation of the individuals concerned, in particular Paul Budge as Group Director and Ms Hague as Group Financial Controller”.
The Committee’s Carillion joint inquiry recommended that the FRC’s powers be extended “to ensure that all directors who exert influence over financial statements can be investigated and punished as part of the same investigation, not just those with accounting qualifications.”
Unlikely the 2014 audit was an isolated case
PWC itself wholly accepted the FRC’s original findings and the unprecedented penalty levied against it, which included PWC senior partner Steve Denison, who gave evidence in the BHS inquiry, taking an effective lifetime ban from audit work and an additional £325k individual fine. In the correspondence with the FRC published today, the Chair states that given the “appalling extent of the audit failures” at PWC “ ( PDF 166 KB) it is difficult to believe that the 2014 audit was an isolated case”. Sir John Kingman has confirmed that he will consider this case as part of his review of the FRC ( PDF 428 KB), and the Chair has further asked whether he will consider the risk of auditors escaping appropriate sanctions for serious misconduct lasting for years ( PDF 169 KB) , when the FRC states that it does not have the resources to further investigate cases where “steps have already been taken to safeguard the public interest ( PDF 195 KB) and sanctions” including record fines “have been imposed”.
As the case progressed the Committee requested that the FRC share the evidence for its “serious criticisms of [Taveta], its directors and its employees” with the Insolvency Service, who had concluded their own investigation into the sale and collapse of BHS in March. The Insolvency Service said in July that it was looking at whether to reopen its investigation.
The Insolvency Service chief Sarah Albon recently wrote to the Committees ( PDF 1.28 MB) stating that the material received from the FRC contains nothing further “that would merit disqualification action”, but offering to “provide further details as regards our investigation” in private.
Comment from Work and Pensions Committee Chair Frank Field, who says,
"The FRC’s findings, even watered down, made it instantly clear why Sir Philip and his “colleagues” at Taveta didn’t want that devastating report to see the light of day. It is difficult for the outside observer to understand why the Insolvency Service sees no reason for further action on what happened at BHS. The current system apparently cannot prevent, capture or punish the conduct that ran BHS into the ground and left its pensioners well short of their entitlement. I hope the Insolvency Service’s insights can now help us start to make the UK’s corporate governance fit for purpose."