The firm, formerly known as Moore Stephens LLP, saw its fine of £825,000 reduced to £455,813. The reduction included a 15% discount to reflect mitigating factors, including the co-operation, and a further 35% discount for admissions and early settlement.
According to the final decision notice, the firm received a severe reprimand, requiring it to “cease or abstain from repetition of the conduct giving rise to the breaches”, and had to accept a declaration that the 2016 audit report – signed on behalf of Moore Stephens – did not satisfy the relevant requirements.
The firm is also required to instigate a number of remedial steps. These include engaging an IT audit and data analytics consultant to hold workshops for senior statutory auditors and staff on IT audit procedures, and to implement new IT audit methodology with an IT systems risk assessment checklist to be completed on every audit ensuring appropriate specialist involvement.
Audit engagement partner Stephen Corrall was fined £110,000, reduced to £60,775 on the same grounds of co-operation, admissions and early disposal. He was also banned from acting as an auditor of a public interest entity (PIE) and from signing PIE statutory audit reports for at least 18 months.
Before he can return to statutory audits, he must be re-approved to conduct them and have completed training in relation to the application of ISAs 220, Quality Control for an Audit of Financial Statements, 320, Materiality in Planning and Performing an Audit, and 570, Going Concern.
The firm and Corrall admitted 11 “serious” breaches of relevant requirements that were “pervasive’ throughout the audit of the retailer’s 2016 financial statements. This meant that the audit failed in its principle objective of providing reasonable assurance that the 2016 financial statements were free from material misstatement.
However, the decision notice makes clear that although the audit work conducted to assess going concern was inadequate, there is no question about Laura Ashley’s entitlement to use the going concern assumption that it did.
The breaches related to three fundamental areas of audit work, including materiality, revenue and going concern.
As far as materiality was concerned, the audit team decided that users of the 2016 financial statements would be interested in both profit and revenue. Choosing revenue as a materiality benchmark for a retailer, as the decision note points out, would be extremely unusual. However, rather than choose between the two benchmarks, the audit team chose to use an average of the two.
“In FY2016, PBT [profit before tax] was £23.9m and revenue was £400.9m,” it says. “Choosing an average of PBT and revenue meant that, in practice, the impact of the PBT benchmark was substantially reduced.
“The audit team calculated materiality of £4.3m. This was 18% of profit before tax, more than three times the threshold of 5% of profit before tax which is very typical for a profit-oriented, public interest entity.”
The higher materiality threshold meant effectively that the audit team would not need to do so much work to provide reasonable assurance that the financial statements were free of material misstatement. However, the note makes clear that it is not suggesting this error was intentional.
When it came to the firm’s audit work on revenue, the audit team originally planned to check Laura Ashley’s sales by tracing them from the till records in stores and other primary records such as internet sales, through to the accounting system and the financial statements.
Yet they did not follow this plan. Instead, they checked two internal systems – the inventory management system and the accounting system. “This meant that they failed to adequately check that the sales recorded in the accounting system and the FY2016 financial statements were correct,” the note says.
The FRC’s investigation also concluded that the audit team did not gather enough appropriate audit evidence on which to base their conclusions about the group’s going concern assumption.
There were a number of failings. For instance, although the audit team noted the importance of cash flow to trading companies, and that Laura Ashley’s cash levels were likely to dip in the run-up to the Christmas trading period (as a result of stock purchases), they failed to assess how much cash the group would need to pay for Christmas stock and whether it had access to enough cash to pay for it. Nor did they pay attention to the group’s cash needs throughout the year.
When assessing the group’s budget for the forthcoming year, the team noted that the predicted 7% increase in sales was “slightly ambitious” given that sales had actually fallen 7% in FY2016. They also calculated that if sales fell by more than 5.5%, the group would make a loss. This, the note says, should have led to further work to determine the appropriateness of the going concern assumption.
Commenting on the case, Claudia Mortimore, the FRC's deputy executive counsel, said, While the financial statements in question are not alleged to have been materially misstated, the audit work in this case was deficient in numerous respects.
It is right therefore that enforcement action has been taken and sanctions imposed. The respondents’ high level of co-operation with the investigation has been reflected in the discount applied to the fines.
In a statement, MSR Partners said it acknowledged, and apologised for, the shortcomings identified in the conduct of the audit. “While these did not result in a failure to identify material error in the financial statements, we recognise they were serious and the decision notice reflects this.
As a result of the shortcomings, we conducted a robust root cause analysis which led to the implementation of enhanced computer assisted audit procedures, and reinforced to audit staff the firm’s requirements for the assessment of materiality and going concern.
In February this year, Moore Stephens' offices in London, Birmingham, Bristol and Watford merged with BDO. The rest of the firm is now known as MSR Partners LLP.