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FRC probes Deloitte audit of Lookers

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Deloitte’s audit of Lookers is under investigation by the UK’s accounting watchdog, as the regulator continues to probe a £19m black hole in the car dealership’s balance sheet.

17th Mar 2021
Journalist
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The Financial Reporting Council (FRC) said it is scrutinising Deloitte’s statements for the years ended 31 December 2017 and 2018.

The Big Four firm resigned its position as auditor of the car dealer in January with a damning letter stating it had been met with non-compliance when trying to address multiple accounting irregularities.

Deloitte said there was “a considerable gap” between the financial controls employed by Lookers and those of other public companies of a similar scale and complexity. 

It said it had advised Lookers to improve the quality and timeliness of its reporting back in 2017, but stood down to be replaced by BDO after a lack of progress from management at the car dealer’s head office.

The 110-year old Lookers, which listed on the London Stock Exchange in 1973, said in delayed 2019 results that it made £25.5m of adjustments to correct profit overstatements from previous years. Trading in shares of the firm was suspended as news of potential fraud emerged. 

A subsequent investigation into its books by forensic accountants at Grant Thornton found a cash expenses fraud which led to a loss of £327,000 in a single division.

Fictitious transactions, misapplication of funds and several other accounting flubs were then highlighted in Lookers’ 2019 annual report as the firm laid out plans to resolve the issues.

More questions for Deloitte

“We take this investigation seriously and are fully cooperating with the Financial Reporting Council,” Deloitte said in a statement. “Audit quality is our priority and we are committed to maintaining the highest professional standards,” a spokesperson added.

In January, the FRC published its tribunal report into Deloitte’s “serious” failings as auditor for Autonomy, the failed software firm that landed the Big Four firm a record fine last year. 

Accounting experts said Deloitte had shown poor judgement and neglected to push back hard enough when confronted with questionable numbers. 

Industry observers have made a similar point regarding the latest investigation. 

“Why is it that auditors aren’t picking up these issues?” Twitter user Taxing Notions said. “Is it lack of training and/or pressure on fees so not much time spent checking things?”

The government’s response to a major review into the accounting sector carried out in 2019 by Sir Donald Brydon, which may reveal policy for dealing with future audit failures, has been delayed.

FCA probe dropped

While the FRC is pressing ahead, earlier this month the Financial Conduct Authority (FCA) closed its probe into Lookers’ sale processes between 2016 and 2019 and declined to administer sanctions. 

The financial services regulator did however express “concerns” relating to “historic culture, systems and controls” at the company, which operates 164 dealerships in total, employing more than 8,00 people.

Lookers had kept aside £10.4m for any potential fine from the FCA, which had been hanging over the firm since July 2019, and will now release the money. 

“It is an important time for Lookers as we emerge from a difficult period dealing with both the challenges of our legacy issues and Covid,” said Lookers chief executive officer Mark Raban. “We are pleased that the FCA has decided to close its investigation and we can now look forward and continue to build our business for the benefit of our customers and other stakeholders.”

In December, following an eight-month delay, Lookers announced a £45.5m loss along with details of major accounting fraud carried out by a former employee.

The firm’s share price has since recovered, almost doubling in price from its end of year lows, and analysts believe the “legacy issues” are being resolved.

Peel Hunt said in a briefing to investors that considers Lookers “well placed for recovery” after “significant operational improvements”.

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