Save content
Have you found this content useful? Use the button above to save it to your profile.
Laura Ashley shops shut down after 2020 collapse
iStock_Roger Utting Photography_Laura Ashley

UHY Hacker Young fined for Laura Ashley audit failings

by

A catalogue of audit standards breaches spanning two financial years at Laura Ashley landed UHY Hacker Young with a hefty bill and a two-year ban from auditing any further public interest entities.

13th Jul 2022
Save content
Have you found this content useful? Use the button above to save it to your profile.

Laura Ashley Holdings plc auditor UHY Hacker Young and audit engagement partner Martin Jones were left with fines of more than £250,000, plus costs, for audit failings at the collapsed retailer.

The audit firm and its partner this week formally admitted serious breaches across nine areas of the FY2018 audit and six of the same areas in the FY2019 audit, ranging from materiality to going concern and basic revenue assessments.

UHY Hacker Young received a severe reprimand from the regulator, along with a £300,000 fine, discounted to £217,000. As the audit partner who signed the compromised audit reports, Jones was fined £32,625. UHY was directed to pay the FRC’s legal costs for the investigation.

During that process, UHY and Jones volunteered to withdraw from undertaking new public interest entity audits for two years, which was reflected in the financial discount and non-financial sanctions imposed by the FRC.

“The breaches in this case were serious and spanned two audit years affecting multiple areas of the audits, some of which were fundamental to the proper conduct of audit,” said Jamie Symington, deputy executive counsel at the Financial Reporting Council (FRC).

“These included the auditors’ failure to adequately challenge or investigate management’s use of the going concern assumption – ie that the company would remain in business for the foreseeable future – despite this being identified as a significant risk for the FY2018 audit due to the state of the retail sector. UHY further failed to respond appropriately to criticism of their work by the FRC’s Audit Quality Review (AQR) team, leading to a repeat in the FY2019 audit of certain breaches which occurred in the FY2018 audit.”

Slow decline

Even before lockdown was announced in March 2020, Laura Ashley was the first major retail failure to cite the pandemic as a factor. Suffering from a long-term decline as online outlets ate into its market share, the flowery fashion and textile brand closed its Australian operation at the end of 2018.

In spite of issuing a series of profit warnings during 2017–18, Laura Ashley plc managers continued to forecast 3–4% revenue growth for 2019 and 2020. That growth failed to materialise and the company started 2020 looking for £15m in loan funding after reporting a loss of £14m on £109m sales in the second half of 2019.

Rescue talks with investors and potential funders hit the buffers after the pandemic caused “an immediate and significant impact” on trading, the company reported. PwC was called in as administrator on 17 March 2020.

New auditors

During this period, Laura Ashley changed auditors in 2017 before appointing UHY Hacker Young in May 2018. On behalf of the firm, Jones signed the audit opinion for FY2018 in September that year. The auditor’s report was unmodified and noted no material uncertainty related to the use of the going concern assumption, the FRC final notice reported.

Jones also signed the FY2019 audit report on behalf of UHY, again with no qualifications or mentions of material uncertainties related to going concern. The FY2019 financial statements were published on 15 October 2019.

The FRC final notice on the case details serious breaches that in some instances were “pervasive throughout the audit” involving failures to report important matters accurately and overstating the depth and detail of the audit work conducted.

The shortcomings documented across 30 pages of the FRC notice include failures to maintain professional scepticism or obtain sufficient audit evidence; and failures of professional judgment and audit procedures to the point that the work undertaken failed to meet the overall objectives of an audit.

Specific breaches related to: materiality (FY2018 only); going concern assessments; revenue; inventory; journal entry testing and fraud risk assessment; property, plant and equipment adjustments and other comprehensive income; pension scheme assets and liabilities; subsidiary investment carrying values (FY2018 only); and long-standing debtors (FY2018 only).

“Failings were most numerous in the FY2018 audit,” the FRC noted. “However, the FY2019 audit nevertheless also demonstrated a large number of significant failings including in relation to most of the same areas as the FY2018 audit, even though the FY2019 audit was carried out after aspects of the respondents’ audit work for the FY2018 audit had been heavily criticised by the AQR.

“In light of AQR’s criticisms of the FY2018 audit, executive counsel would have expected the respondents’ audit work for the FY2019 audit to have been of a much higher quality.”

Hollowed-out company?

In an interesting side light on Laura Ashley’s decline, AccountingWEB members raised questions about the company’s corporate accounts back in 2016. “It looks like in some years they have been paying dividends in excess or retained earnings in the balance sheet,” commented DP Walsh.

GW responded: “If you look at the balance sheets the consolidated accounts show cumulative losses but the holding company shows retained earnings. The dividends come from the holding company, the losses are somewhere else in the group.”

“Good isn’t it?” added Comptable. “You make huge management charges to the [subsidiaries] who incur losses but giving the parent company a profit from which it can pay a dividend. For tax you use group relief to set the subs’ tax losses against the parent’s tax profits and pay no corporation tax.”

The shell game of moving “shedloads of cash and loans” around and around continues until the company collapses and everybody loses, Compable added in what looks to be a classic example of the hollowed-out company documented by Richard Murphy.

Tags:

Replies (9)

Please login or register to join the discussion.

avatar
By Paul Crowley
13th Jul 2022 14:27

Not just the big boys then
Surely a two year ban means a certain skill loss that would be difficult to come back from?

Thanks (0)
By ireallyshouldknowthisbut
13th Jul 2022 15:04

Given pretty much every time a business goes pop the audit is checked and found to be wanting.

Do the FRC check Audits where the business has not gone bust? They might find the approach with Laura Ashley is about standard. ie get the management to sign off representations that its all wonderful and avoid doing much digging.

Thanks (2)
avatar
By Hugo Fair
13th Jul 2022 15:11

You'd think that lesson 1 at Auditing School would be "Ask questions".

Hopefully, with experience, the questions might become more pertinent (reaching the heady heights of 'common sense') ... and eventually, now a professional, the Auditor would learn the importance of qualifying their Report - not just signing whatever's put in front of them.

But at least start by asking questions ... which (yet again) doesn't seem to have happened here!

Thanks (2)
avatar
By JustAnotherUser
13th Jul 2022 15:30

when is the Top Fines This Year league table being published? Seems to be a fine a day being published on here.

Thanks (2)
Replying to JustAnotherUser:
avatar
By Paul Crowley
13th Jul 2022 16:26

We could have a league table with points awarded
These are in the top 20 per their website so not that many companies to search

Thanks (2)
Replying to Paul Crowley:
avatar
By Hugo Fair
13th Jul 2022 16:36

All the action should be at the relegation end of the table ... and then what?

Thanks (1)
Replying to Hugo Fair:
avatar
By JustAnotherUser
14th Jul 2022 07:57

.

Thanks (0)
avatar
By SJH-ADVDIPMA
14th Jul 2022 11:06

Kemi Badenoch for PM. Just saying.

Thanks (0)
Replying to SJH-ADVDIPMA:
avatar
By Paul Crowley
14th Jul 2022 13:56
Thanks (0)