FRC To Determine Whether Missing a £30 Million Overstatement Was, In Fact, Bad Auditing

The Financial Reporting Council announced today that they’re officially investigating PwC UK’s 2024 audit of WH Smith which means fines and hand-slaps are likely forthcoming once that gets wrapped up. Although you may have never heard of WH Smith, it’s possible you’ve purchased something from one of their shops if you’ve ever grabbed a pair of headphones from an airport InMotion store.

We haven’t written about WH Smith here at GC except for a few fleeting mentions of happenings in our Monday or Friday newswraps so let’s get a little quick and dirty backstory down here.

Last August, the retail company’s shares fell 42% after they announced an accounting error, discovered when they were preparing their year-end, that caused North America profits to be overstated by a modest £30 million ($40 million USD). The Guardian explained that error thus:

The mistake relates to arrangements it has with suppliers, which offer rebates if the retailer hits sales targets on certain items and payments for marketing and promotions. It is understood, however, that income should have been logged in accounts for the next financial year rather than for the 12 months to 31 August.

PwC audited WH Smith since 2015. Funny enough, they didn’t flag the overstatement until after the company had already disclosed it.

A few months later, Deloitte came in to do an independent review of fiscal years 2023-2025 [PDF] and found the following:

the accounting treatment for supplier income adopted by the North America division was not consistent with the Group’s stated accounting policy and consequently was not consistent with the requirements of the relevant accounting standards;
supplier income recognition has been overstated in North America. As a result of this finding, the Company expects prior year adjustments to be recorded;
the overstatement of supplier income identified in the North America division is substantially a timing rather than an existence issue, and relates to the application of accounting standards; and
the methodology and conclusion of the Internal Audit review of supplier income for FY25 across the UK and ROW Travel divisions is appropriate and supplier income has been appropriately recognised in these divisions.

Additionally, Deloitte said that the North America supplier income issue had “arisen against a backdrop of a target-driven
performance culture and decentralised divisional structure combined with a limited level of Group oversight of the finance processes in North America” as well as “weaknesses in the composition of the finance team” and “insufficient systems, controls and review procedures for supplier income across commercial and finance functions.”

Should be an easy one for the FRC, the homework is half done already.

Audit

Should Auditors be Able to Take Credit for Selling Non-audit Services?

Caleb Newquist
December 8, 2009

The partner track is a challenge, as we’ve discussed. The competition in the UK is fierce enough that some directors and manager in the UK have taken it upon themselves to ignore their firm’s policies regarding cross-selling:

Authorities frown upon cross-selling, which involves an auditor selling non-audit services to their audit client. The practice is a potential threat to auditor independence and the Big Four explicitly prohibit the practice from being considered in staff appraisals.
But that didn’t stop Big Four firm Deloitte’s audit directors and managers referring to cross selling when trying to secure a promotion, according to the [Audit Inspection Unit].
“A number of audit directors and managers referred in their performance evaluations to cross selling non audit services to their audit clients,” the report stated.

Maybe this isn’t as much of a problem Stateside, since the SEC has addressed services that are definitely off-limits, and a company’s audit committee has to approve all non-audit work performed by the auditors. If there was a perceived independence issue, one would hope the committee would say no dice and that would be the end of it.
However, if a potential service doesn’t fall into the SEC banned list and the audit committee gives the non-audit service the thumbs up, should a manager be allowed to point to the business that he/she introduced to the firm?
After all that hoop jumping, it would be hard for any manager to resist pointing to business that the firm eventually won. Since the Big 4 have policies against cross-selling coming up in appraisals, it might all be moot but any potential partner still wants to be able to show that they can drum up the business.
If you’ve got feelings or experiences on the matter, discuss in the comments.
Big Four partners seek promotions for cross selling [Accountancy Age]