Lawyers from Sports Direct have approached the Department for Business, Enterprise and Industrial Strategy (BEIS) to gain clarity on the role of BEIS following the resignation of auditor Grant Thornton
The involvement of the government in any auditor appointment would be an unprecedented situation.
If Sports Direct were unable to find an auditor, this would leave the Secretary of State with the decision on what action to take. The audit regulator, the Financial Reporting Council (FRC), would have no role in any decision.
The Secretary of State has a power in section 490 of the Companies Act 2006 (CA 2006) to appoint an auditor to a public company. However, that power only arises if the company fails to appoint an auditor at its accounts meeting (usually the AGM). The company must notify BEIS (via a notice to Companies House) within a week if the Secretary of State is forced to use these powers.
A BEIS spokesperson told Accountancy Daily: ‘We have not received a formal notification to provide assistance to the company to find an auditor. Lawyers for Sports Direct have requested clarity on our role, and we have responded.’
In addition, BEIS confirmed that ‘only if the accounts meeting [AGM] failed to conclude with the successful appointment of an auditor would we expect to be formally notified that had happened’.
The resignation of the company’s long-term auditor, which was announced as markets opened on 14 August, will take effect from 11 September, the date of the company's annual general meeting (AGM), in all likelihood leaving the FTSE 250 listed company without an auditor. Grant Thornton has audited the firm since 2004, before the company listed.
Joint Sports Direct / Grant Thornton statement
In order to propose an auditor to the shareholders, directors have to complete a public tender process. A public tender is needed at least once every 10 years and should result in a choice of at least two auditors being given to the shareholders, with a stated preference, as stated in the Audit Regulation and Directive (ARD) rules, which came into force in 2016.
Sports Direct has said that it will be tendering its audit business and plans to hire a Big Four auditor, but there are potential conflict issues and the Big Four firms have said that they do not plan to tender for the audit business.
Late yesterday (Wednesday) afternoon Sports Direct issued a joint statement with Grant Thornton repeating that the company was going to look for a Big Four auditor and that Grant Thornton’s resignation was the result of the mid-tier audit firm reviewing the profitability of its current audit accounts.
‘As referred to in the Chief Executive's Report and Business Review in Sports Direct’s Annual Report and Accounts for the period ended 28 April 2019, Sports Direct has a longer term aim of looking to engage a Big 4 auditor in the future.
‘In line with the audit profession as a whole reviewing their client portfolios for, amongst other reasons, audit profitability, during a period of increased regulatory scrutiny, GT's review of its client portfolio alongside Sports Direct's future intentions on engagement of a Big 4 auditor has led to a decision by GT to not seek reappointment as Sports Direct's auditor.’
The statement also said that 'the board of SD are comfortable with SD's accounts for the period ended 28 April 2019 and believe a fully robust audit was carried out of SD's financial statements'.
Grant Thornton is facing an ongoing FRC investigation over the preparation, approval and audit Sports Direct’s financial statements for the year ending 24 April 2016, over concerns that an arrangement between a Sports Direct subsidiary, Sportdirect.com Retail Ltd (SDR), and Barlin Delivery Ltd had not been disclosed as a related party transaction in the company’s financial statements.
Sara White | 15-08-2019