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FRC questions advisory work role in audit independence

The independence and objectivity of PwC’s audit of British Home Stores (BHS) parent Taveta Group may have been compromised by the level of advisory work it was doing for the same company, the UK’s Financial Reporting Council (FRC) has suggested in a report looking at the collapse of the UK retailer.

The report said fees charged by the firm for non-audit services exceeded the fees charged for audit work by a wide margin. For the years ending 30 August 2014 and 30 August 2015 non-audit fees were eight and five times as much as audit fees, respectively.

The FRC found this created a ‘self-interest threat to independence and objectivity within the meaning of the Code of Ethics and the Auditing Practices Board’s ethical standards’.

In June, the FRC revealed the fines and the sanctions it had leveed on Denison and PwC but failed to publish its full report due to the attempted injunction by BHS’s former owner Philip Green.

While the fines and sanctions were ‘welcomed’ by the parliamentary select committee which led the investigation into the collapse of BHS, it was requested that the full report be made public so that it could deem if the penalties were appropriate.

At the time the sanctions were issued, the FRC only reported that ‘PwC and Steve Denison have admitted Misconduct’ in relation to the work performed for BHS. The report published on 15 August has explained the range of missed conduct ranged from the back dating of audit reports to displaying a lack of integrity and independence.

Prior to the sale of BHS in March 2015 for a nominal sum of £1 ($1.27) to Retail Acquisitions, Denison recorded only two hours of audit work for the year ending 30 August 2014 for BHS’s holding company Taveta and its subsidiaries. Retail Acquisitions owner at the time, Dominic Chappell, had previously been registered as bankrupt.

The report noted that for the year ending 30 August 2014 Denison and a senior manager, referred to as ‘A’, only recorded nine hours on the audit for Taveta Group.

Denison delegated much of the work to junior members of the team. In the report a member of PwC’s audit team, only referred to as ‘B’, who only had one year of post-qualification experience recorded 29.25 hour, while the remaining members of the audit team, who were even more junior to ‘B’ recorded over 114 hours.

The report found that Denison only performed one hour of audit work on 12 February 2015 and one hour on 9 March 2015 with no audit work performed between or after those dates despite knowing that BHS was likely to be sold to Retail Acquisitions.

Denison is said to have ‘failed adequately, or at all’ to supervise the work he delegated to ‘B’, despite ‘B’ not knowing that the sale of the company was to take place.

The report also found that Denison had backdated some audit reports which he then tried to conceal when he had actual the reviewed the files by citing computer problems as a reason for the backdating.

For the misconduct committed, PwC and Denison were fined £10m and £500,000, respectively. Both fines were reduced by 35% due to early settlement. Non-financial sanctions were also implemented. 

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