Julia Irvine 5 Jul 2018 11:33am

Going concern regular issue in audit failures, says Field

Work and Pensions Committee chair Frank Field has accused auditors of appearing to rubber-stamp going concern statements without seriously challenging companies' management about them

And he has asked the Financial Reporting Council (FRC) what more can be done to ensure that auditors are “properly challenging the appropriateness” of these statements.

Field wrote to FRC chief executive Stephen Haddrill with follow-up questions following Monday’s High Court’s rejection of Sir Philip Green’s application for an interim injunction to prevent the regulator publishing the PwC BHS settlement statement and particulars of fact and misconduct.

In the letter, he points out that the going concern basis features regularly in the audit failures that the FRC investigates.

“Clearly, therefore, PwC’s failure over BHS is not an isolated incident when it comes to the going concern basis,” he writes.

“It feels like once again this is a case of skewed incentives working against the best interests of ordinary stakeholders, such as employees and pensioners.

“On the one hand you have management teams who have little incentive to openly admit to the risk of their companies collapsing and on the other you have an audit team whose whole audit approach would need to be reassessed if it was felt that the going concern basis was not appropriate.”

The issue of going concern arose during the court hearing when it was revealed that the FRC’s executive counsel “concluded that the basis of the going concern was obviously insufficient in the face of a pending sale”.

Taveta, Sir Philip’s investment company, which owned BHS until 2015, sold the retail chain just five days after PwC had given the financial statements a clean bill of health. A year later, BHS had crashed.

Taveta took the FRC to court in an effort to prevent publication of the settlement agreement and particulars which its lawyers said criticised the group’s accounting practices and various members of the finance team to such an extent that publication would significantly damage their reputations.

Although the court recognised that the documents did contain potentially libellous statements, it concluded that the case did not meet the high bar necessary for an injunction against a public body.

It also made it clear that Sir Philip was not one of the individuals involved.

In his letter, Field wants to know what the FRC intends to do now about publishing the documents. Originally, they were intended for release along with the announcement about the sanctions against PwC and BHS audit partner Steve Denison on 12 June.

Field also asks the FRC to reveal whether or not it has investigated the one Taveta accountant involved in the preparation of the BHS accounts prior to its sale who belongs to an accountancy body under its regulation.

In a statement, the FRC reiterated that it would consider the detailed judgment before it published the report and that it hoped to do so “as soon as possible in the public interest”.

“We will reply to Frank Field in due course,” it added.