The senior auditor who signed off BHS’s accounts days before its sale by Sir Philip Green backdated his audit opinion and spent just two hours working on the file, according to an explosive memo from his former employer.
Sky News has obtained an email written by Kevin Ellis, the UK chairman of PricewaterhouseCoopers (PwC), which catalogues failings by Steve Denison, who had been responsible for auditing BHS and Taveta Investments, the holding company for Sir Philip’s Burton-to-Top Shop high street empire.
The bombshell note sent to nearly 1,000 partners at PwC is heavily critical of Mr Denison’s conduct.
Last week, the Financial Reporting Council (FRC), which regulates audit firms and accountants, effectively banned Mr Denison – a 30-year PwC veteran – from the profession for 15 years, and fined him £500,000.
As Sky News revealed six days ago, Sir Philip is challenging details of the FRC’s full report on the auditing of BHS and Taveta, with a hearing due to take place at the High Court later on Thursday.
In his email to partners, Mr Ellis described Mr Denison’s supervision of the audit work as “inadequate”.
“He was responsible for the overall quality of the audit, supervising the audit and issuing the auditor’s report.
“He failed to carry out these responsibilities appropriately, delegating too much work to a junior team member and only recording two hours of work during the completion stage.”
Mr Ellis said that Mr Denison backdated his audit opinion that BHS was a going concern by three days, compounding this misconduct by making “a false statement on the audit file relating to the circumstances of the backdating”.
The PwC chief added that while this did not have an impact on the audit opinion itself, “neither of these actions is acceptable”.
In addition to Mr Denison’s fine and ban, PwC itself was hit with a £10m penalty – reduced to £6.5m because it agreed to an early settlement – for its failings.
Among the other flaws in the BHS and Taveta audit oversight highlighted by Mr Ellis were:
:: A failure by Mr Denison and PwC to “consider or identify the risk of threats to their objectivity and independence, such as a non-audit fee: audit fee ratio of up to 8:1”.
:: An insufficient gathering of evidence “as to whether BHS was a going concern in circumstances where we knew BHS was about to be sold”, and a failure by the firm to request documentation produced by Taveta about the department store chain’s going concern status.
:: Not properly dealing with the carrying value of an investment in BHS and a loan to BHS which had been waived.
Mr Ellis said his email would make “uncomfortable reading” for colleagues.
“This situation should not have happened and we need to face up to the failings and learn the lessons,” he wrote.
Mr Ellis added that the legal tussle sparked by Sir Philip meant there were restrictions on the details he could share about the case.
Taveta’s application for a judicial review marks a rare, although not unprecedented, challenge to the FRC.
It is the latest in a series of legal fights arising from the demise in 2016 of BHS, which crashed into administration with the loss of about 11,000 jobs.
Sir Philip agreed last year to pay up to £363m into BHS’s pension scheme to end the threat of action against him by the pensions watchdog, and has faced no further action from the Insolvency Service.
Dominic Chappell and other directors of his vehicle, Retail Acquisitions, are still mired in regulatory probes and legal proceedings brought by various bodies, including the Insolvency Service and Pensions Regulator, in connection of his purchase of BHS.
The imposition of what effectively constitutes a lifetime ban for Mr Denison – who also chairs Yorkshire County Cricket Club (CCC) – has sent shockwaves through the UK’s accounting profession.
Mr Denison was among the witnesses called to give evidence to an inquiry by MPs into BHS’s collapse in 2016.
He told a hearing in May that year that there had been valid reasons for signing off BHS’s accounts with a “going concern” opinion shortly before Mr Chappell bought the retailer.
“The existing management team was trying to turn the business around, and had some success in driving costs down and reducing cash requirements; the cash requirements were lower than the losses shown; and there was a deal which would bring extra cash from the vendor and new cash from the purchaser.
“Compared with the plans, there was no material uncertainty.”
The record fines imposed on Mr Denison and his former employer came almost two years to the day after the FRC launched its probe into the audit of BHS.
Sir Philip had sold the chain for £1 to Mr Chappell, a three-times bankrupt, barely a year earlier.
The scale of the punishments for PwC and Mr Denison has raised questions about the FRC’s motives at a time when its future is being scrutinised as part of a government-commissioned review.
Greg Clark, the business secretary, asked Sir John Kingman, the former Treasury mandarin, to examine whether the FRC is fit for purpose following growing disquiet about apparent conflicts of interest and the pace of its enforcement inquiries.
Frank Field, the Labour MP who co-chaired a joint select committee inquiry into BHS’s collapse, wrote to PwC this week seeking further information about the firm’s audit of BHS and Taveta.
PwC and the FRC declined to comment on Thursday, while Sir Philip could not be reached.
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