The accounting profession has been shaken yet again by another scandal, which implicates major industry stakeholders in the latest BHS case.
A recent report by the UK Parliament's Work and Pensions Committee does not hold back when it comes to the reasons for the demise of British chain, British Home Store (BHS).
Sir Philip Green and Lady Tina Green were heavily implicated in the downfall of the traditional British brand. However, it wasn’t just the owners that were under scrutiny.
Accounting firms PwC and Grant Thornton were also not spared in the no holds barred report. The report accuses Big Four firm PwC of failing to “dispute BHS’s director’s assessment that the business remained a going concern.”
The report also states that while PwC knew that BHS would lose the support of its parent company, Taveta Investments, if it was to be sold off, 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.”
The Parliamentary Committee also said they were “surprised that PwC did not more deeply question whether BHS was genuinely being sold as a going concern.”
Another firm caught up in the demise of the BHS scandal is Grant Thornton. The report states that although Grant Thornton did indeed identify many significant risks to BHS meeting its cash flow requirements, they still refused to answer “questions about their own due diligence report despite the fact that a copy of it was provided to us by Dominic Chappell.”
Dominic Chappell owns Retail Acquisitions Ltd (RAL), which bought BHS from Green for one pound in March 2015.
“Sir Philip Green, Dominic Chappell and the respective directors, advisers and hangers-on who all got rich or richer are all culpable, with the only losers the ordinary employees and pensioners.
“Dominic Chappell, his friends and associates were enticed by the personal rewards on offer without taking any personal risks,” reads the report.
In light of the above developments revealed in the report, the Parliamentary Committee encouraged the Financial Reporting Council (FRC) to investigate the matter:
“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.”
Back in July the FRC examined PwC’s conduct in relation to the audit of financial documents in the year to 30 August 2014, a year prior to Green’s selling of the business for 1 pound.
The FRC carried out a preliminary investigation confirming “suspicion of misconduct” which gave way to an official and formal investigation. Should the investigation by the council be upheld then PwC could be fined and some individuals revoked of their audit licence.
At the time a spokesman for PwC said: “We will co-operate fully with the FRC in its inquiries.” PwC, one of the UK’s Big Four professional services firms, stepped down as BHS’s auditor after the sale to Retail Acquisitions in March 2015.
The FRC’s investigation, which will look at BHS’s financial statements for the year to August 30 2014, follows pressure from Richard Fuller MP. He wrote to Stephen Haddrill, FRC chief executive, in April, asking that the watchdog undertake an investigation of the conduct of the directors and advisers involved in the transaction that resulted in the sale.
FRC unfit for investigation
Despite the FRC’s willingness to fully investigate the issue at hand, some academics believe this cannot happen. Writing for The Accountant in July Professor Prem Sikka, said the FRC is not a suitable body for investigating the BHS audits because of many factors including:
The FRC is too close to the auditing industry, and therefore its standards have contributed to the problems the company is now facing.
The scope of the investigation is too narrow, and so the problems BHS is facing cannot be understood from a 2014 audit.
BHS’s finances were deeply entangled with other companies under the Green name and therefore any successful investigation must include all other companies who have held transactions with them. And as PwC conducted much of the transactions as it holds a close relationship with them, the investigation would not be impartial.
Sir Philip Green’s “final responsibility”
Sir Philip Green, chairman of the Arcadia Group and his wife Lady Tina Green were accused of “systematically extracted hundreds of millions of pounds from BHS, paying very little tax and fantastically enriching himself and his family, leaving the company and its pension fund weakened to the point of the inevitable collapse of both,” states the report.
Banishing Green as unfit for his title the Parliamentary Committee’s report stated that there is: “little evidence to support the reputation for retail business acumen for which he received his knighthood.”
Green caused a deficit in the company’s pension scheme which was in surplus prior to his purchase of the company: “His family took out of BHS and Arcadia a fortune beyond the dreams of avarice, and he's still to make good his boast of 'fixing' the pension fund. “
“What kind of man is it who can count his fortune in billions but does not know what decent behaviour is?" added the report.
Rt Hon Frank Field MP, chair of the Work and Pensions Committee, said:
"One person, and one person alone, is really responsible for the BHS disaster. While Sir Philip Green sign posted blame to every known player, the final responsibility for up to 11,000 job losses and a gigantic pension fund hole is his.“
“Sir Philip Green must act now to find a resolution for the BHS pensioners, a "moral duty" which will undoubtedly require him to make a large financial contribution.”
The company seemed to be making a huge profit in the period immediately after the purchase was made. One method used to gain the “cash lite” cash extraction was achieved by Green with the help of his wife Tina Green, whose company Carmen Properties Limited bought ten BHS stores for £106m ($139), BHS then paid rent to Carmen to use them.
They were ultimately sold back to BHS for only £70m (with the proceeds of the sale going to Lady Green as the sole beneficial owner) but, over the lifetime of the sale-and-leaseback arrangement, rent of £153 million was paid by BHS to Carmen.
“Lady Tina Green is still being paid tens of millions of pounds of tax free repayments on the loan that was engineered to sell BHS from one Green family business to another, and will be for some years to come,” states the report.