The management at BHS made unreasonable and optimistic assumptions about the retailer’s future ahead of its doomed sale to a serial bankrupt, the accountancy watchdog has said.
Sir Philip Green sold BHS to Dominic Chappell for £1 in 2015, just over a year before the business collapsed, which led to the loss of 11,000 jobs.
The Financial Reporting Council (FRC) on Wednesday published a report on PwC’s audit of the BHS accounts ahead of the sale, justifying its decision to levy an unprecedented £10 million fine on the firm for its part in the demise of the business.
The FRC also sanctioned Steve Denison, the audit partner responsible for the work, who was Sir Philip’s main contact at PwC before the sale.
The watchdog said Mr Denison failed to act with integrity as he incorrectly blamed an IT error for the backdating of the accounts, and left large amounts of work to a junior auditor who was not aware BHS was being sold.
In drawing up BHS’s accounts, the retailer’s bosses made a number of assumptions about the business’s future cash flow that the FRC described as both “unreasonable” and “very optimistic”.
BHS executives forecast the firm’s like-for-like sales would increase by 6.7% in 2015, even though sales dropped 2.6% between 2012 and 2014, and the womenswear market was only growing by 2.9% as a whole.
In addition, BHS sales fell 1.8% by January 2015, three months before the audit was completed.
The management team also assumed losses would decline by 10% each year for five years and, from that, forecast the firm would break-even from 2022 on.
The FRC said Mr Denison should have been more sceptical of these assumptions, and that he did not find enough evidence to establish whether BHS was making a profit or a loss.”