BHS’s accounts were misleading and featured unrealistic forecasts before Sir Philip Green sold the now collapsed department store chain, according to a report into the role of the retailer’s auditor, PwC.

The Financial Reporting Council (FRC) said BHS’s 2014 accounts were “incomplete, inaccurate and misleading” because they said Taveta, BHS’s owner, would provide it with financial support. But Taveta’s backing only applied while it owned BHS. When the audit was signed in March 2015, BHS was days away from being sold for £1 in a deal that eventually led to its collapse.

The watchdog’s report, which was changed after Green objected to its contents, shines a light on BHS’s accounting and the failure of PwC and the firm’s senior audit partner Steve Denison to scrutinise the business. The FRC fined PwC a record £6.5m in June and banned Denison from audit work for 15 years. Denison was also fined a record £325,000.



The FRC said: “The respondents [PwC and Denison] gave no consideration to how these matters may have impacted BHS’ ability to continue as a going concern. They failed to gather any audit evidence on which to conclude that the going concern assumption was appropriate. Based on the audit evidence obtained, they should have concluded that a material uncertainty existed about BHS Group and BHS’s ability to continue as going concerns.”

The FRC said PwC, one of the big four accountants, and Denison failed to test many of the assumptions made by the management of Taveta, Green’s retail empire, about BHS. The assumptions included an estimate that BHS’s like-for-like sales would rise 6.7% in 2015 – even though its retail sales had fallen 2.6% between 2012 and 2014. BHS management assumed the chain’s annual loss would shrink by £30m in 2015 from £69m the previous year as margins expanded and sales rose.

“Such margin and sales growth were unsupported by audit evidence and should have appeared to the respondents to be unrealistic and require further investigation,” the FRC said.

Taveta sold BHS for £1 to the former bankrupt Dominic Chappell’s Retail Acquisitions vehicle on 11 March 2015, two days after PwC signed off BHS’s accounts. The chain collapsed in April 2016 with the loss of 11,000 jobs, leaving a £571m pension deficit.

Taveta tried to block publication of the report, which it said contained defamatory statements based on “a partial and inaccurate view of the facts”. The judge refused its request for an injunction but said the regulator should consider whether publishing the report in its existing form was lawful. The final report did not criticise Green or name any of his management team.

Responding to its publication, Taveta said the report was about PwC and Denison and that the FRC had stated no one else was criticised. But it said that, despite revisions since the court case, the report still gave a potentially misleading picture of BHS’s affairs. The FRC failed to reflect the post-sale support Taveta provided to BHS and Taveta’s directors “reserve all their rights in respect of the report”, it said.



A screengrab of Steve Denison giving evidence to the House of Commons business committee in 2016. Photograph: PA

The FRC criticised Denison for being too close to Taveta’s management. It said Denison and PwC failed to guard against a conflict of interest caused by the large amount of non-audit work the firm carried out for Taveta.

In 2014 Taveta paid PwC £355,000 in fees for audit work, which is essential for holding companies to account and ensuring their books are in order. In the same year PwC charged Taveta £3.3m for other services, which “risked inappropriately influencing the respondents’ judgment or behaviour”, the FRC said.

In 2014 Denison said: “I continue to receive great feedback from the senior people at my clients (Sir Philip Green and Paul Budge at Arcadia) ... As a result, the incidence of them asking the other firms for help or advice is very limited.”

Between 1 January and 9 March 2015 Denison recorded only two hours of work for auditing Taveta’s financial statements, including BHS. An accountant with a year’s post-qualification experience, referred to as B, recorded 29.25 hours and other more junior members of the team recorded 114.6 hours.

B did not know BHS was being sold until around the time the accounts were signed off. The FRC said the time recorded by Denison was inadequate.

The report describes the most incredible example of complacent audit rubber-stamping one could fear to imagine Frank Field MP

Frank Field MP, the chairman of the work and pensions select committee, who has lobbied for publication of the report, described its contents as devastating. He added: “The report describes the most incredible example of complacent audit rubber-stamping one could fear to imagine.”

He added: “The FRC has accepted Taveta’s arguments that they were simply ‘very optimistic’ about BHS’s prospects as a going concern. That sounds like a euphemism of the most preposterous proportions. If Sir Philip and his fellow directors really do believe they had proper evidence that BHS was a going concern, then surely they will be happy to put that evidence in the public domain so that BHS employees, pensioners and creditors can judge for themselves.”

Field has written to Green asking him to provide the basis for the “going concern” assessment and details of Taveta’s “management assumptions” – which are the subject of much of the FRC report’s criticisms.

PwC said: “We are sorry that our work fell well below the professional standards expected of us and that we demand of ourselves. This is unacceptable and we agreed the settlement recognising that it is important to learn the necessary lessons.

“Our audit methodology was not followed in this instance. We have taken steps to bolster the supervision and review of our audits. We took swift action to enhance our support and monitoring procedures. We have agreed with the FRC to extend these further for an additional period. Whilst the failings did not contribute to the collapse of BHS over one year later, they were serious and this is reflected in the Financial Reporting Council settlement.”