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Tom Herbert

Auditors and advisers slammed for BHS mess

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28th Jul 2016
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An excoriating MPs' report into the sale and subsequent collapse of BHS has blamed leadership failures, individual greed and ‘group think’ for contributing to the demise of the High Street retailer.

While the investigation into the store’s slide into insolvency blamed former owner Sir Philip Green and Dominic Chappell, who purchased the group from Green for £1 in March 2015, advisers Grant Thornton, auditors PwC and the Financial Reporting Council all came in for varying degrees of criticism.

The report from the work and pensions and business, innovation and skills select committees singled out Green, the billionaire former owner of BHS, alleging that he had “systematically extracted hundreds of millions of pounds from BHS, paying very little tax and fantastically enriching himself and his family, leaving the company and its pension fund weakened to the point of the inevitable collapse of both.”

However, it also criticised advisory firms who “either did not consider the reputational risk or demonstrated a remarkable level of ‘group-think’ in relying solely on each other’s presence” when assessing the group’s financial position.

Expensive badge of legitimacy

Advisers such as Grant Thornton were labelled by the report as an “expensive badge of legitimacy for people who would otherwise be bereft of credibility”, and “content to take generous fees” despite expressing concerns over the viability of the business and its future.

Prior to 2015’s takeover of BHS by Chappell’s company Retail Acquisitions (RAL) Grant Thornton and legal firm Olswang undertook due diligence on BHS, and although the committees found the due diligence was “detailed and rigorous”, the firms were seen as “preoccupied with how their fees would be paid following the completion of the transaction”.

Evidence submitted to the committees stated that the two firms earned fees of £1.75m in relation to the deal alone, which were higher due to its success. During a tetchy appearance before the committee Green told MPs that the fees in total ran to more than £8m.

Neither Grant Thornton nor Olswang were blamed for RAL’s decision to complete the purchase of BHS, but although both advisers highlighted significant risks to the future of the business, including potential cashflow issues, Grant Thornton was criticised for producing a report “which could have more clearly explained the level of risk associated with the acquisition and offered firmer observations”.

The report was also critical of Chappell’s decision not to release his advisers from their formal obligations, denying them the opportunity to explain their actions in the public domain.

Commenting on the report a statement from Grant Thornton said: “Grant Thornton’s only role in the pre-acquisition period involved carrying out financial due diligence on behalf of [RAL]. Following the acquisition, we were working for BHS to provide consultancy services to the management team.

“We undertook our work in the belief that we could help BHS’ management team to turn the business around, and find a sustainable solution for the pensions scheme”, continued the statement. “It is regrettable that this hasn’t been possible, but we wouldn’t have been a part of that work if we didn’t believe we had experience of real value to share with BHS and its management.”

Corporate governance

The report also slated BHS’s corporate governance structure, calling the performance of non-executive chairman Lord Grabiner “complacent” and representing “the apogee of weak corporate governance”.

“It was his responsibility to provide independent challenge and oversight”, continued the report. “Instead he was content to provide a veneer of establishment credibility to the group while happily disengaging from the key decisions he had a responsibility to scrutinise.”

Commenting on the report BIS committee chair Iain Wright said that the sale of BHS to a consortium “led by a twice-bankrupt chancer with no retail experience should never have gone ahead”.

“There was a complete failure of corporate governance”, continued Wright, “with Sir Philip bulldozing the sale through, without proper oversight or challenge from his weak and impotent board.”

Surprised PwC did not question sale

The report also criticised PwC’s role as external auditor to BHS. The group’s 2012–13 and 2013–14 annual report and accounts stated that the company was a ‘going concern’ on the basis of financial support provided by the Taveta Group, owners of Green’s Arcadia Group.

As PwC was aware that BHS was due to be sold and lose Taveta’s ongoing support, PwC did not dispute BHS’s directors’ assessment that the business remained a going concern.

“Given that Grant Thornton’s own due diligence of BHS had identified a number of significant risks to BHS meeting its cash flow requirements”, said the report, “we were surprised that PwC did not more deeply question whether BHS was genuinely being sold as a going concern.”

In an appearance before the committee, PwC’s Steve Denison stated that although the auditors recognised that BHS would lose the ongoing support of Taveta if it was sold, they also considered the additional cash, assets and resources it would gain to allow the company to continue to trade in the future.

The committee said that the 2013–14 accounts were signed off on 6 March 2015, just days before the sale of BHS to RAL and while the deal was still being discussed. The committee noted that the accounts were normally signed off in May of each year.

While the FRC investigation into PwC’s role as auditor of BHS for the two financial years prior to the sale was welcomed, the committee urged the regulator to come to a conclusion quicker than the two years which it has currently scheduled.

The report also stated that the BHS story “begs much wider questions about the gaps in company law and pension regulation that must be addressed”, and while “the respective directors, advisers and hangers-on who all got rich or richer are all culpable”, with the only losers the ordinary employees and pensioners”.

Has the committee got it right and was everyone to blame, or were the advisers simply doing their job? Is there anything they could have done to halt BHS’s decline?

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By Scriptic
28th Jul 2016 14:59

"...risks to BHS meeting its cash flow requirements” identified?

The most cursory view of the accounts in 2014; net current assets £186 million in the red and equity shareholders funds £256 million also in the red and more of the same for many years previously could have told them that.

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By HGW
28th Jul 2016 21:51

In 1985 BhS had gross sales in excess of £600m and trading profit in excess of £60m. I should know - I was the Financial Controller. I moved on in 1988. I weep for the way it has been neglected. Somebody somewhere should have acted much sooner.

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