Lookers announces £46m loss following accounting fraud investigation
Car dealer Lookers has released its long-awaited annual report for 2019, detailing enormous losses and evidence of a major cash expenses fraud following an investigation by Grant Thornton.
After eight months of delay, car dealer Lookers has finally published its 2019 accounts and revealed a £45.5m loss along with details of significant accounting fraud carried out by a former employee.
Lookers’ annual report disclosed that profits were overstated by £25.5m over several years, including £10.9m in 2019 alone.
The embattled car dealer also announced a £21.8m shortfall, of which £8.3m related to the previously unreported 2019 financial statements and £13.5m related to previous years, the business said.
The fraud, approximately £327,000 across a number of years, was perpetrated by one unnamed individual who is now the subject of a criminal investigation, the company said.
In anticipation of a heavy penalty by the Financial Conduct Authority, Britain’s finance watchdog, Lookers has set aside £10.4m. It estimates the probe will cost at least £15m, and will close 12 dealerships as part of an imminent restructuring plan.
"Lookers should be prepared for some short-term pain, this year hasn't been easy for anyone and doesn't look to be improving before spring next year,” said Rick Smith, managing director of Forbes Burton, a business rescue and insolvency specialist. “A restructuring plan being implemented now needs to be done in a calm and measured way. Nobody will be envying a new CEO there; to guide the brand out of this mire will be no mean feat."
Lookers was forced to suspend its shares on July 1 after uncovering suspected fraud. Forensic specialists at Grant Thornton were called in and promptly widened the investigation to pore over balance sheets of previous years and past accounts. The group subsequently postponed its 2019 results several times as the teams continued to uncover evidence of wrongdoing.
“The investigation identified accounting irregularities including certain financial systems and controls weaknesses, non-compliance with the group’s accounting policies or accounting standards, and poor accounting,” the company said in the annual report.
Lookers said it is working with the FCA to improve its governance, compliance, and risk management controls. This will include an overhaul of its compliance functions, new reporting functions, and the appointment of new risk officials and non-executive directors with experience of guiding regulated businesses.
It will also help an ongoing investigation by the FCA’s Enforcement and Market Oversight team into the group’s sales processes and potential breaches of certain FCA’s principles and rules regarding the period 1 January 2016 to 13 June 2019.
“The investigation into our financial systems and accounting controls, the delay in the publication of our 2019 results, and the subsequent temporary suspension of our shares have been a great disappointment,” said chairman Phil White in a statement. “As chairman of Lookers, I would like to apologize unreservedly to all our stakeholders for the uncertainty this has caused.”
White said his focus now is “to restore the listing of our shares and to strengthen the board.”
“What will make or break them as a firm will be the new CEO's leadership,” said Smith. “They need to show a strong hand and have a definitive direction they want to take the brand. He also needs to be given the freedom and the funding to do this.”
Nobody can save a company when limited in their decision-making, Smith said. “To avoid any fraudulent activity in the future, better management structures will no doubt be in need of construction, and a more hands-on approach may be needed,” he added.
Lookers reiterated that it expects to post a “material” underlying loss in the first half of its new financial year, but that third quarter trading was better than expected.
The group is worried about its chances of continuing as a ‘going concern’ if the bleak outlook for the automotive sector materialises. It has ‘war gamed’ a number of adverse scenarios, with a no-deal Brexit, ongoing coronavirus uncertainties and other macro-economic factors modelled in.
“Despite resilience of liquidity, the aggregate of these factors gave rise to a material uncertainty which may cast significant doubt over the company’s and group’s ability to continue as a going concern,” the company said.
A consortium of five banks, each of which lend the group £50m for a total revolving credit facility (RCF) of £250m, have decisions to make over their continued support of the car dealer.
Revised lending covenants until June 2021 have been approved which consider the impact of Covid-19, however Lookers is not alone as almost every dealer group has broken banking agreements during the pandemic.
“The group is subject to certain reporting deadlines with its lenders,” Lookers said. “Delays in achievement of those deadlines could cause a covenant breach. In such circumstances and without actioning mitigating actions available, the group may be unable to realise assets and discharge liabilities in the normal course of business.”
Smith told AccountingWEB in the long run, the firm “should be able to weather the storm as long as the process is robust and goes smoothly”.
Sold for parts
A potential carve-up of the business may be on the cards. Looker’s pension liability may present a problem, as it has agreed with trustees to increase payments to £12m a year, at a time when it is burning through cash.
The group posted a loss of £45.5m despite bolstering its stock funding by £108m during the 2019 financial year.
“The bad news for Lookers is all out there now and the fact remains the group still has some fantastic businesses within it,” said David Kendrick, partner at accountancy UHY Hacker Young. “I can certainly see some of the portfolio being slimmed down as they dispose of businesses and focus back on their core as well as improving controls. I don’t believe someone will take the whole group as it is too large and I remain convinced that big is not always beautiful.”
Research by the Society of Motor Manufacturers and Traders (SMMT) has found that preparations for Brexit have already cost the UK’s automotive sector £735m.
The industry body pleaded with MPs to strike a last-gasp zero-tariff trade deal with the EU when it outlined its report, which showed more than £235m had been spent by the sector in 2020 alone.
It claimed that a ‘no deal’ outcome, or failure to achieve a workable deal, would result in a £47bn hit to the UK car industry over the next five years, on top of the ongoing cost of the coronavirus pandemic.
SMMT chief executive Mike Hawes said: “As the UK-EU FTA negotiations enter the endgame, now is the time for both sides to deliver on promises to safeguard the automotive industry.”
Specialist customs agents have been appointed by just over half of the firms surveyed, the SMMT said, as companies try to prepare for any disruption or delay to supply chains.
Production could fall below 1m cars a year if there is no deal, compared with more than 1.3m in 2019, because tariffs would make large parts of the UK business unviable, the SMMT said.