The Financial Reporting Council (FRC) has issued sanctions against UHY Hacker Young and Martin Jones, an audit engagement partner, in relation to their audits of the financial statements of Laura Ashley for the years ended 30 June 2018 and 30 June 2019.
Laura Ashley first fell into administration in March 2020, at the time claiming the pandemic had had “immediate and significant impact on trading”.
Before this, however, its group revenue, operating profit, profit before tax and profit after tax has “consistently declined” between FY2016 and FY2019, while its loss after tax increased ten-fold from £1.4m in FY2018 to £14m in FY2019.
Despite this, UHY’s audit reports for FY2018 and FY2019 were unmodified and “noted no material uncertainty related to the use of the going concern assumption”.
In light of this, UHY received a “severe reprimand” as well as a fine of £300,000. In addition, it has been ordered to not accept appointment as statutory auditor to any PIE for which it is not currently acting as auditor until May 2024. The firm must also cover the costs of the investigation.
Jones was also reprimanded and received a fine of £45,000, while being ordered to not sign any statutory audit report for a PIE for a period of two years from 11 May 2022.
The FRC noted that Laura Ashley and the executive counsel do not suggest that Laura Ashley’s administration was caused by the breaches made by UHY during the audits, however.
UHY and Jones nonetheless both admitted serious breaches, which affected nine areas of the FY2018 audit and were repeated in six of the same areas in the FY2019 Audit. The audit areas included: determination of audit materiality (FY2018 only); going concern assessment; and revenue.
The FRC said: “As a result of the breaches, the FY2018 and FY2019 audits each failed in their principal objective, namely to obtain reasonable assurance about whether the financial statements as a whole were free from material misstatement.”
Jamie Symington, deputy executive counsel, said: “The breaches in this case were serious and spanned two audit years affecting multiple areas of the audits, some which were fundamental to the proper conduct of audit.
“These included the Auditors’ failure to adequately challenge or investigate management’s use of the going concern assumption – i.e. 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.”
He added: “UHY further failed to respond appropriately to criticism of their work by the FRC’s Audit Quality Review team, leading to a repeat in the FY2019 Audit of certain breaches which occurred in the FY2018 Audit.”
In a statement to Accountancy Today, UHY said: “Audit quality is a key focus and priority for UHY Hacker Young, but we recognise that the audits relating to Laura Ashley Holdings PLC for the financial years 2018 and 2019 fell below the high standards that we, as a firm, set for ourselves. However, as confirmed by the FRC’s findings, the insolvent administration of LAH was not caused by the issues identified by the regulator, but was attributed by LAH’s administrator to the impact of the Covid-19 pandemic on the group’s business.
“As the FRC has recognised, following the LAH audit we carried out a full external review of our audit control procedures and of our audit compliance and quality systems. As a result, we have enhanced our Training and Technical Team and have implemented a more targeted and intensive training regime for all members of our audit teams.”
It added: “We are confident that the numerous and wide-ranging improvements we have put in place following this review have significantly raised the quality of the audits that we undertake and have addressed the issues identified by the FRC.
“We have also informed the FRC of our voluntary decision to refrain from conducting new statutory audits of Public Interest Entities (as defined under current legislation), for at least two years. Our decision not to take on new audit work of such companies does not impact our very active and successful AIM and other listed markets audit practice.”