Boohoo, EG Group and Poundstretcher have all seen their auditors resign in recent weeks.  Having originally fought for the engagement, why the about-turn?

Ultimately, audit work can be high risk, with pressure to provide an unqualified report that confirms the accounts show a true and fair view of the business.  Independence also needs to be maintained and  regulatory guidelines followed.  COVID-19 has created additional difficulties, particularly for those auditing clients in the retail sector.

The audit process involves evaluating the use of the “going concern” concept when preparing an entity’s accounts.  “Going concern” confirms a business has sufficient resources to cover its liabilities for the next 12 months.  That is 12 months from sign off, as opposed to year-end.  Auditors must scrutinise clients’ cash flow forecasts and assumptions to conclude on this.  However, for retailers such as Poundstretcher, at the mercy of lockdowns and with no online sales, this is becoming increasingly difficult.  Add to this, the pandemic’s impact on supply chains, price uncertainties surrounding Brexit and a need to meet fixed property costs, and “going concern” becomes a minefield.

BDO’s Companies House filing stated its Poundstretcher resignation followed “an assessment of commercial risk and reward associated with the audit”.  This risk is very real, as third parties rely on audited accounts when making trading, investment and lending decisions.  However, these third parties do not pay the audit fee, with those that do, generally seeing the process as inconvenient, resource sapping and of no added value, as the business has since moved on.  This problem intensifies as important Management Letter follow ups, which stimulate the discussion for future improvements, see less focus when working to a budget.  As auditor resource and professional indemnity costs also rise, it is therefore not surprising that better paid, less risky consultancy work starts to become more appealing.

Audit firms themselves are subject to inspection by their Recognised Supervisory Body, such as the ICAEW, who regularly review a sample of their files.  The Financial Reporting Council also independently regulates the industry.  Its Revised Ethical Standard 2019 recently redefined and restricted the non-audit services auditors can now offer.  With increasing levels of fines, if a choice needs to be made, accountants will of course be pushed towards their most profitable services.

Reputational risk is also significant for auditors, who, like any other business, would prefer not to be associated with an investigation or scandal.  According to the Financial Times, PwC recently resigned as auditor of Boohoo, which came under scrutiny for the exploitation of workers in its supply chain.  Whilst the independent review by Alison Levitt, QC, found Boohoo had not profited from the abuses, it noted internal processes were “well below the standard which would be expected of a company of its size and status”.  It went on to recommend improvements to corporate governance, compliance and monitoring processes.

Similarly, the Financial Times reported Deloitte had resigned as auditor of petrol station giant EG Group, after their successful bid for Asda, following concerns that governance and internal controls had not kept pace with growth.  Governance is an expanding and time-consuming part of any audit process, yet has a low fee recovery rate, making an audit with governance complexities unattractive.

Overall, the remit and risk of audit is increasing.  “Going concern” sign off is particularly difficult for many retail clients in the current environment, governance issues are intensifying and the need for auditors to maintain a good reputation remains key.  If risk exceeds reward, an auditor may have little option but to exit.  Having said that, risk perception will differ between auditors depending on their own outlook and existing client base.  In terms of mitigating risk, this is a difficult ask in a pandemic, when much is outside a retailer’s control.  However, strong governance, robust internal controls, an expanding sales mix, to include online channels, and forecasts with realistic assumptions, will help the business and its auditor alike.

Should you need any help with financial forecasts please let us know.

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07780 336952 Delphine Paterson FCCA ACIB

 This article, written by Delphine Paterson, was also published in RetailWeek Nov 2020