BHS was a well-known British high street retailer. By the time of its closure in 2016, it had a total of 163 stores and employed 11,000 staff. In 2000, the BHS retail group (which was at that time part of the Storehouse Group) was bought by Sir Philip Green for £200 million. In July 2009, Taveta Investments (No. 2) Limited (“Taveta 2”) acquired BHS Group Ltd (“BHS Group”) for £200 million. BHS Group was the holding company and BHS the principal trading company. From 2003, PwC was the auditor of the Taveta Group which, from July 2009, included Taveta 2, Arcadia and the BHS Group and its subsidiaries (including BHS Limited).
Mr Denison was, from 2009, the PwC Senior Statutory Auditor for the Taveta Group. He was the Engagement Partner responsible for the conduct and overall quality of the audit. He signed relevant auditors’ reports on the financial statements in his own name on behalf of PwC. He was found guilty of misconduct concerning his audit opinions on the financial statements for the year ending 30 August 2014 of the Taveta Group, BHS Group and BHS, Arcadia and Taveta 2.
The FRC fined PwC £6.5 million and Mr Denison £325,000.
At the time of the audit, BHS had been loss making for a number of years and was being supported by the Taveta group. In addition, BHS had very significant deficits in its two defined-benefit pension schemes in relation to which it had been engaging with the Pensions Regulator (“tPR”). During the course of the BHS audit, and prior to issuing the audit reports, the Mr Denison became aware of the likely sale of BHS. Completion of the audit was brought forward to accommodate the sale. Due to the sale, BHS’s financial statements were likely to be subject to increased scrutiny. The financial statements were likely to be of interest to the purchaser and the purchaser’s professional advisors as well as lenders, suppliers, trade creditors and tPR.
The audit reports for BHS and BHS Group were signed by Mr Denison on behalf of PwC on Monday 9 March 2015 (Mr Denison backdated them to Friday 6 March 2015). Two days later, on 11 March 2015, BHS Group was sold to Retail Acquisitions Limited (“RAL”) for a nominal sum of £1. As part of the sale, Arcadia wrote off £216 million of a £237 million inter-company loan which was owed by BHS Group and its subsidiaries to Arcadia. Just over a year later, on 23 March 2016, BHS’s creditors agreed to a Company Voluntary Arrangement (“CVA”). Shortly afterwards, on 25 April 2016, BHS Limited was put into administration, with a deficit in its pension scheme of £571 million and a loss of 11,000 jobs.
In the period, from 1 January 2015 to 9 March 2015: Mr Denison recorded only 2 hours on the audit of the financial statements of the “Taveta Group”, including BHS Limited, and the audit manager recorded only 7 hours. Both Mr Denison and the audit manager both recorded substantial amounts of time on non-audit services for the same clients in the same period from 1 January 2015 to 9 March 2015 ( Mr Denison recorded 31 hours on non-audit services in this period). PwC’s time recording shows that Mr Denison recorded one hour on the Taveta Group audit on 12 February and one hour of work on 9 March 2015 but no time at all between those dates and no further time after 9 March 2015. The FRC described this as “inadequate”.
In 2014, the Taveta Group paid PwC £355,000 in audit fees and £2,859,778 in non-audit fees. The value of non-audit services that PwC sold to the Taveta Group therefore exceeded the value of the audit services that it sold to the Taveta Group by a factor of eight. In 2012 and 2013 the factor was three and in 2015 the factor was five.
The FRC state that PwC and Mr Denison failed to apply sufficient professional scepticism and obtain sufficient appropriate audit evidence. They failed adequately to understand and to test many of management’s assumptions and estimates. For example, BHS Management had assumed that BHS’s like-for-like retail sales would go up by 6.7% in 2015. However, BHS’s retail sales had gone down 2.6% between 2012 and 2014 and BHS’s retail sales had fallen 1.8% by January 2015, three months before the audit was finished.
Also Mr Denison back-dated his audit opinion relating to the financial statements of BHS. He then attempted to conceal or obfuscate the truth about when the audit was completed by making a false statement concerning IT issues on PwC’s electronic audit file.
PwC’s tax team had advised on aspects of the sale (and, in the context of its advice about whether pension contributions could be deducted for tax purposes after the sale, an individual within the tax team had expressed the view that BHS was “effectively bust”). The FRC state that PwC and Mr Denison failed to consider adequately, or at all, the impact of the sale on the going concern assumption or perform additional procedures. They failed to obtain sufficient appropriate evidence about the appropriateness of management’s use of the going concern assumption.
Frank Field the Chairman of the House of Commons Work and Pension Committee stated that it was the “most incredible example of complacent audit rubber-stamping on e could fear to imagine.”
PwC stated “we are sorry that our work fell well below the standards expected of us.”
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