For the first time, auditors in the retail sector have shared their insights and expertise gained from their audits of the UK's retailers in a report that identifies critical issues for the sector - and also issued a stern warning urging business against over-reliance on like-for-like sales data.
Auditors working in the sector have said that too much reliance on like-for-like trading figures are not always consistent or directly linked to profitability.
In their Audit Insights: Retail report from the ICAEW's Audit and Assurance Faculty, auditors highlight three flags for the retail sector as seen from an auditors' point-of-view. These include underdeveloped IT and data management systems, which makes it difficult to get a proper understanding of profit drivers and manage working capital; the changing retail landscape's impact on retailers' management of their property portfolio and understanding of value of store sales compared to online sales; and lack of consistency in producing the sector's key performance indicators.
Julie Carlyle, head of retail at Ernst & Young and member of the ICAEW working party that prepared the report said that recent years have seen a seismic shift in how the retail sector operates, driven by changes in technology and consumer behaviour.
'Like-for-like sales figures are one key way of judging retailers' performance. This key performance indicator gets a lot of attention, yet how it is prepared can vary. It is not always a reliable indicator of how a business is performing. While investors will understand that, the wider public may not appreciate it. Greater transparency around judgments made could benefit investors and a standard method for calculating like-for-like sales would create a far more reliable tool for decision making.
'The trend of heavy discounting has changed the relationship between sales data and profitability. More sales don't necessarily mean higher profits. Sales volumes can be driven at the expense of profitability,' said Carlyle.
The report also identified some practical ways and benefits of enhancing retailers' IT and data management systems and the challenges linked to managing property portfolios, resulting in onerous lease provisions, impairments of fixed asset, difficulty in assessing profitability across stores and cashflow.
The report is the first in a series of sector-specific reports to be published in 2013, aimed at making the expertise and insights of auditors - gained through their unique view of businesses of all types and sizes - available more widely without compromising client confidentiality. It summarises key issues auditors have identified and reported back on to audit committees and senior management in a way that has not been done before.
Charles Bowman, chair of faculty, said: 'This series of reports will allow a greater part of the public to benefit from the understanding and insights auditors have into their clients and the sectors in which they operate.
Audit plays an important role in strengthening accountability, reinforcing trust and providing confidence in business through providing an independent opinion to shareholders on the truth and fairness of a company's financial statements.'
