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EY dumps Asda amid governance concerns and debt

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EY is continuing the trend of Big Four firms walking away from red flags, having quit as auditor to troubled supermarket Asda.

31st Jan 2024
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EY has resigned as auditor to debt-laden Asda, but neither firm disclosed the separation despite the precarious state of the supermarket’s finances and a recent grilling of its owner Mohsin Issa by MPs.

It has also emerged that billionaire chief executive Issa, who owns the company along with his brother Zuba, started a romantic relationship with a senior EY partner.

No announcement

EY quit in July, but Asda made no announcement of the resignation in paperwork filed with Companies House. 

The supermarket told the media it had informed lenders of its listed bonds back in August. A source close to the retail chain told the Daily Telegraph, which broke the story, that EY felt there were no reasons to inform investors or creditors of its decision.

In December, Issa and other senior figures at Asda were ordered to appear before an influential panel of lawmakers to explain how they intended to deal with the supermarket’s £4.2bn debt pile. 

Mohsin and Zuba, who bought the firm in 2021, are facing around £30m of additional interest costs in the coming weeks, as £500m of the debt is subject to new, floating borrowing rates.

The brothers funded the £6.8bn purchase of Asda with loans, the first wave of which are soon due.

Mohsin told MPs he was confident the business would turnaround and pay off what it owes.

Fractured relationship

Media reports have also speculated the brothers’ relationship has fractured as the debts pile up across their petrol and takeaway empire. 

It is believed that Mohsin’s involvement with the EY partner has fuelled some of the tension.

Last year, the pair sold more than 200 KFC restaurants to the fast-food chain’s Kentucky-based parent company Yum Brands in order to reduce their debts, which are nearing £8bn across their entire portfolio.

Risk-averse auditors

EY has said that the partner in question is no longer with the firm, and did not carry out any work relating to the auditing of Asda.

Filings reveal the partner quit the day after EY dropped Asda as a client.

EY said it walked away following a restructuring of the Issa brothers’ businesses. The Big Four firm said it was unable to carry out an expanded audit following a complex acquisition of the EG UK&I business by the brothers.

Auditors felt they would not be able to stick to the timetable of issuing an audit opinion by 31 December, 2023, and took the decision to resign.

The former EY partner in question issued a statement through lawyers clarifying her position of having complied with all necessary policies, noting that the firm had accepted her disclosures to its ethics and compliance teams.

Audit resignation

A spokesperson for Asda said: “In a letter last summer, EY confirmed that they would not be able to undertake the enlarged audit – taking into account the acquisition of the EG UK&I business and the significant increase in scale and complexity of the group within the timetable to issue their audit opinion for the year ended 31 December 2023. We notified investors about this on 8 August 2023.”

EY declined to comment further than confirming that it notified Asda via letters of resignation in July and saying its exit was related to “the acquisition of Euro Garages (Jersey) Ltd and the timetable requirements of the audit”.

The Issas are now searching for their third major auditor in four years following Deloitte’s decision to split from the brothers’ EG Group in 2020 over corporate governance concerns. 

Following a string of scandals and major pressure from the government to improve standards, Big Four firms have shown more of a willingness to walk away from risky clients.

Earlier this year, EY also quit as auditor of investment consultancy MJ Hudson after stating it had “lost trust” in the firm’s management.

Troubled waters

Ownership issues have dogged Asda since the Issas bought it in a heavily leveraged takeover deal with private equity firm TDR Capital in 2021.

The £6.8bn purchase from US retail giant Walmart has been mired in controversy given the opaque structure of both the deal itself and the brothers’ complex web of 16 holding companies based in Jersey, which was criticised by lawmakers. 

Registering the companies offshore helped the business reduce its exposure to stamp duty on selling any lines, the firm’s chief financial officer, Michael Gleeson, told MPs.

Gleeson told the business committee that 95% of Asda’s debts are on fixed rates.

The company’s debt payments totalled £396m in 2022 and the annual bill would rise to £426m in February, Gleeson admitted.

Inaccurate evidence

Mohsin also had to reassure MPs he had not misled Parliament after submitting inaccurate evidence regarding the company’s ownership structure and its tax status, with the botch later blamed on an “administrative error”.

Sentiment is no rosier on the shop floor, as the supermarket is bringing in a four-day week to appease unhappy store managers. A slew of cost-cutting exercises led to walkouts among senior store managers, and the move is part of an attempt to mend fences and quell the exodus.

“Asda’s failure to disclose the resignation of its auditors, while under intense public scrutiny for the running of the business, highlights once again the complete disregard for the importance of transparency,” said Nadine Houghton, national officer at the GMB Trade Union.

“At no point during either TDR’s evidence to the Business and Trade Committee nor Asda’s evidence did any Asda representative have the decency and integrity to disclose the resignation of its auditors – did they simply forget?”

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Replies (6)

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By Andy Hull
01st Feb 2024 11:14

Wow, too dodgy for EY

Thanks (3)
David Winch
By David Winch
01st Feb 2024 14:59

Have new auditors been appointed?

Thanks (1)
Replying to davidwinch:
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By Andy Hull
01st Feb 2024 15:57

King & King, recommended by Sanjeev Gupta

Thanks (2)
Replying to Andy Hull:
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By FactChecker
01st Feb 2024 16:11

Hopefully that's not the KING & KING (ACCOUNTING & ADVISORY) LTD who were dissolved on 16 May 2023?

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Replying to FactChecker:
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By Andy Hull
02nd Feb 2024 12:22

The address ties up, but the website is still live. The Companies House history looks ............interesting. Just the job for the Asda boys

Thanks (1)
Replying to FactChecker:
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By HamishMackrell
02nd Feb 2024 16:56

the dissolved company was dormant.
The partnership audits of 4 companies are being "investigated by the F R C" since 2022.

Thanks (1)