BHS Death: Who is to Blame?

Image: The Herald, Scotland https://goo.gl/X59KeM

British Home Store (BHS) was born in 1928 with steady expansion growth and increasing competition with rival stores that bring excitements to the British workforce and customers. In pursuit of survival, BHS has undergone several successful surgical operations in the post-war era such as expansion across the UK, merging and franchising its brand. Many feared that BHS survival chances would diminish in 2000 when Sir Philip Green took charge of the company health affairs, but he dismissed the fears. However, sickness symptoms were confirmed in 2005 when BHS announced its losing customers to rivals. After several attempts to revive BHS, the health continued to deteriorate. This continued until 2015 when it was transferred to Dominic Chappell, unfortunately for BHS its health has gone beyond resuscitation. In 2016, the once healthy and competitive BHS was in coma without a chance of survival.

Losers

Although all BHS stakeholders were disappointed in the news of its death, this has different implications for different stakeholders. During its heyday, BHS had 163 stores, 11,000 British workforce that comprised direct and indirect staff, servicing 22,000 pensioners, tax-payer, and 1.2m British loyal customers. These were the biggest losers as the death of BHS significantly changed their way of life and in some cases, it threatened their survival as well.

Image: Drapers, https://goo.gl/vDGG41

Companies Act 2006

The Companies Act 2006 s830 specifies that companies should only distribute a dividend to the shareholders from the profit available or accumulated profits. This profit should be after deducting its accumulation losses. Also, Companies Act 2006 s172 specifies the duties of company’s directors to act in good faith with the aim of promoting the company’s success for all its members. In the case of BHS, members include all the stakeholders such as employees, pensioners, customers, suppliers, creditors, government, UK taxpayers, and shareholders.

Many commentators argued that Sir Philip Green and his family members along with other shareholders did not regard corporate governance or Companies Act 2006; and they made decisions on the BHS activities in their personal interest to the detriment of the other BHS members. Other commentators believed that The Green family and other shareholders enjoyed unfettered access in the heart of BHS; that was cleverly done with a complex company structure and inter-company transactions that include £422m dividend pay-out against £208m profit, £10m loan interest, £151m rent received from sales and lease-back, £250m management charges and £3m ground rent, all received from BHS. As a result, between 2000 and 2015, the pension fund has fallen from £5m surplus to 571m deficits and BHS survival and going concern was set on a slope.

Structure of Taveta Group (Controlled by the Green Family): Source from HC Committee Reports, https://goo.gl/reA7Er


International Standards on Auditing

The International Standards on Auditing (UK) specifies that the objective of the audit work on the financial statement is to give reasonable assurance. This assurance should be included in the auditor’s report to highlight whether the financial statement is free of error or fraud. Although, it is not a guarantee that material misstatement due to error and fraud will always be detected when audit work complies with ISA (UK). However, the ISA (UK) requires that auditor should exercise professional judgment in identifying and assessing the material risks in the financial statements. Auditors are required to design and perform audit procedures that are responsive to material risks, and to obtain appropriate, and sufficient evidence regarding the business activities from audit procedures upon which audit opinion will be formed. In this regard, PricewaterhouseCoopers (PwC) audit design and procedures failed to detect or raise going concern issue during 2015 audit when BHS was sold for £1.

PwC Leeds firm audited BHS Group Ltd financial accounts for the 74 weeks to 29 August 2009 and since then they continued to audit BHS financial account till 2015. They are also the auditing firm for other Green Family companies such as Taveta Investment Limited and Taveta Investment (No.2) Limited, the parent companies of BHS. Commentators believe that this could have created threats to their objectivity due to possible close or personal relationship with the Green family and non-audit fee (audit fee ratio of up to 8:1). These threats include familiarity, intimidation, and self-interest as the audit firm and senior partner may not be necessarily sceptical and may be sympathetic towards the directors and employee with whom they have a relationship.

Image: Accountancy Age, https://goo.gl/ZVN1Yu

On the 13 June 2018, the Financial Reporting Council (FRC) halted the over 30 years career of Steve Denison a senior partner with a 15-year ban and £325,000 fine. PwC accounting firm was fined £6.5m and FRC will be monitoring their practice over the next three years.

Blame

In my opinion, the directors of BHS acted unethically and with total disregard for the Companies Act 2006 and corporate governance in discharging their duties between 2000 and 2015. Considering the consequences of their actions, the innocent pensioners, direct and indirect employees and taxpayers will pick up the bill for the BHS pension deficit. It is unfortunate that those directors got away with just over £363m fines without a ban from serving as company directors in the future or possibly jail terms.

However, as much I would like to agree with  PwC that their failure could not have contributed to BHS death, from a professional viewpoint, they have the duty not only to advise the BHS board of directors, but the 2015 Audit Report should have explicitly raised going concern issues. This would have raised other stakeholder’s awareness as the Audit Report would have been available to the public through Company House.

Mayowa Akinbote ACCA, MA, PGCHP, FHEA, BSc.                                                Lecturer in Accounting and Finance                                                                        Staffordshire Business School

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