Auditors run for cover as SportsDirect chaos continues

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The chaos at SportsDirect has taken another twist after Grant Thornton signalled its intention to quit as the troubled company’s auditor after an unexpected £614m Belgian tax bill.

A retail tycoon, accusations of minimum wage breaches, Belgian tax bills and a failing High Street: the SportsDirect story has more moving parts than a Robert Altman film, and it’s all become too much for the company’s longtime auditor Grant Thornton (GT).

The firm has informed the Financial Reporting Council (FRC) of its intention to quit as auditors of Mike Ashley’s controversial retail empire. The final nail in the coffin, it seems, was last week’s bizarre delay of the company’s results.

SportsDirect was due to deliver its financial results during the day, only for the announcement to be delayed at the last second by the sudden arrival of a €614m tax bill from the Belgian authorities relating to VAT charges on goods moved within the EU.

The delay was announced only hours before GT was due to sign off its accounts. When SportsDirect’s statement finally did arrive - an hour after the markets closed for the day - it explained the tax bill in more detail. 

In his chief executive’s report, Mike Ashley explained the fine related to, inter alia, “the tax treatment of goods being moved intra-Group throughout the EU via Belgium”. He added, “The payment notice is not a formal tax assessment but a ‘proces verbal’ whereby [SportsDirect] will enter a ‘fiscal mediation’ in order to respond to the tax authorities questions and provide them with documentation”.

Aside from the Belgian tax revelation, SportsDirect’s accounts included an update on the struggling House of Fraser, the department store which Mike Ashley acquired in August 2018. The statement uses the word ‘terminal’ no less than four times, including a line that states the troubled department store’s problems are “nothing short of terminal in nature”.

The episode has seemingly spooked GT enough to ditch SportsDirect, which it has audited since 2007. For SportsDirect and the audit market more generally, this creates quite a conundrum.

SportsDirect is a complex, multi-group entity, and presumably would require the audit muscle of a Big Four firm if GT walks away from the contract. But as Ashley revealed in his statement, finding a replacement won’t be simple.

Deloitte does SportsDirect’s tax compliance and advisory work, so it can’t perform audit work at the same time. KPMG has cited conflicts of interest based on an existing portfolio of clients, while EY and PwC have indicated an unwillingness to take the job on.

If none of the top five are willing to take the job, SportsDirect, a complex multi-entity group, could be forced to further along the audit food chain. According to Robert Stell, director of Rise Audit, the pool of firms able to audit SportsDirect is limited.

“If you think about the spectrum of auditors, you have people like us at the one end and then a firm like KPMG on the other,” said Stell. “You have to be three-quarters of the way along that continuum to find a firm that’s big enough.

He added, “It would have to be top 50.” The problem is not only size, however. Potential auditors must be willing to deal with Mike Ashley. “Someone like [Ashley], who is reportedly an autocrat, may want to influence the auditor,” said Stell.

In the highly unlikely event that SportsDirect is left without a willing auditor, the consequences would be dire, said Stell. “The shares would be suspended. That’s ultimately what would have to happen,” he said. “Without an audit, you don’t have any data for the public to make investment decisions.”

In this eventuality, it’s likely the government would intervene and appoint an auditor, Stell added.

Ashley, for his part, has made little effort to dispel any notions of his spikey character. In his statement, he threw barbs at the Big Four for their hesitance to work with SportsDirect despite having been “more than happy to audit, for instance, Debenhams or Carillion”.

“[SportsDirect adheres] to our core principles in our dealings with investors and the market in general, namely being conservative, consistent and simple.”

*8 Aug 2019: This article was amended to adjust a quotation*

About Francois Badenhorst

Francois

I'm AccountingWEB's business editor. Feel free to get in touch with comments, tips, scoops or irreverent banter. 

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By Jholm
05th Aug 2019 16:11

I don't have any audit experience but I am happy to take one for the team and volunteer as tribute.

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to Jholm
06th Aug 2019 11:58

Got to be at least £1.3m up for grabs

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to Jholm
06th Aug 2019 14:30

Jholm wrote:

I don't have any audit experience but I am happy to take one for the team and volunteer as tribute.

Hahaha the audit hunger games!

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06th Aug 2019 15:44

Just document the reputation of the owner then issue an adverse opinion on that basis.

Probably the correct end result, but I doubt the owner will authorise the company to pay the audit fee.

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By DJKL
to AnnAccountant
06th Aug 2019 16:23

Monthly billing is obviously the way to go.

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07th Aug 2019 12:05

Add the following note to your audit report :

"The events depicted in this report are fictitious. Any similarity to any company, events, person living or dead is merely coincidental"

Maybe the problem is that auditors don't want to work a zero hours contract for less than minimum wage?

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By mominnz
to LostinSuspense
08th Aug 2019 09:54

well said.

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By mominnz
08th Aug 2019 09:53

Hi Francois, usually I read accounting web as I find it to have quality material and information with unbiased views. Being an editor I didn't expect your review to be biased and dirtying waters for Sports Direct.
I personally believe that you should provide quality information instead of thrashing Mike Ashley.
As far as the audit goes, the big four or five are already prone to systematic failures without any doubts and I think that would be a positive light for smaller firms to take on the challenge.
Mike Ashley wouldn't be providing the ledgers to the auditors so the fact about intimidation doesn't seem to be true.
Thoughts welcome.
Thanks.

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to mominnz
08th Aug 2019 10:43

Hi mominnz,

Tom here, editor of the site. Thanks for your comment.

I disagree with the assertion that the piece is biased: all the information contained in the report is a matter of public record.

However, where I will give a little ground is that one of the quotes was a little incendiary, and so we have slightly amended it.

Thanks for reading and best wishes,

Tom

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By mkowl
08th Aug 2019 09:54

Is it wrong to say I hope they go bust - I am not at all bitter and twisted that Newcastle recently poached our manager

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08th Aug 2019 10:31

Presumably if a similar type of organisation to that of Sports Direct which had a similar structure and management and which was not adversely focused on by the media was available as an audit prospect for the “big four”, anyone of them would happily take on the challenge. In fact the big four probably already audit any number of organisations with “autocratic” leaders wanting to “influence” the auditors. It’s just that these organisations are currently under the radar of the media as were Debenhams, Carillion et. al. before their problems became known in the public domain. It is very easy for the “big four” to be holier than thou when the spot light is on them! With regard to Sports Direct, I continue to be amazed at the good old British trait of “build them up and knock them down”!

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By Munch
to AshBavalia
08th Aug 2019 11:11

100% agree. I have previously commented that the industry of audit needs to be overhauled. The conflict with profitability is a serious issue.

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By Munch
08th Aug 2019 10:59

The big 4 have some nerve.......talk about throwing stones in a greenhouse. The quality of their audit work has been questionable for years.....check out the recent fines nevermind going back further.
https://www.ft.com/content/594c8bf2-b2e8-11e9-8cb2-799a3a8cf37b

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