Grant Thornton set to retain Sports Direct audit

Sports Direct has hit out at claims that it is looking to replace its auditor Grant Thornton after delaying the release of its preliminary results, stating that it plans to reappoint the mid-tier firm for another year subject to a vote at this year's AGM

The plans to reappoint Grant Thornton were confirmed in the FTSE 250 company’s preliminary results, released late Friday after days of delay, having first announced plans to defer by three days from the originally scheduled 23 July. At the time it blamed the ‘complexities’ relating to its purchase of House of Fraser last August and a request from auditor Grant Thornton for more time to review the financials.

The company also faces a tax investigation in Belgium after issues over intra-group transfers.

Sports Direct Group (SDG) said that it plans to put its audit business out to tender ‘in due course’, as incumbent auditor Grant Thornton has been in post since 2004, and continued as auditor when the company listed in 2007. Under EU audit tender rules, the company has to review its audit relationship every 20 years, although best practice recommended by the Financial Reporting Council (FRC) calls for a 10-year audit tender review, unless there are significant factors which would be detrimental if the auditor were to change, for example during a major acquisition.  

It also cited conflicts of interest due to non-audit services (NAS) caps, as Deloitte for example handles the group’s tax business.

The SDG chief executive’s report stated: ‘We have noted inaccurate reports of an audit tender process being run in 2019, this is not the case. We have been in contact with a number of the big 4 firms to try and build a relationship in anticipation of a tender process in due course. The last tender process was in 2016.'

However, this contradicted comments made by the audit committee, then led by Simon Bentley, an ex BDO partner, in last year's annual report and accounts signed off on 18 July 2018. 

This stated that the company was 'part way through the process of undertaking an audit tender process. In order to achieve an efficient and orderly handover, our current intention is to ask our shareholders to approve re-appointment of Grant Thornton for one further year at the AGM. We intend to announce our proposed new auditors later this year on conclusion of the tender process, who will therefore be in place for the year ended April 2020'. 

Bentley subsequently resigned his post and was replaced by Richard Bottomley, an ex KPMG partner, in October 2018.

‘Grant Thornton have been the SD Group auditor since 2007 and the first year-end subject to audit after this date was the April 2008 year-end. In line with mandatory rotation rules their last possible year will be the April 2027 year-end.

‘The SD Group has grown exponentially in size, geography, and complexity over recent years and we do not believe a firm outside of the Big 4 will potentially be able to cope with such an audit in the future. However, we currently have Grant Thornton who have vast experience of the Sports Direct Group and our intention is to ask our shareholders to approve their reappointment for a further year at the AGM.

‘Our early discussions with the big 4 have thrown up some barriers; Deloitte who do our tax compliance and advisory work cannot perform audit work at the same time and thus would currently be unable to tender.

‘KPMG have indicated conflicts of interest based on an existing portfolio of clients, however we do not believe based on our understanding of big 4 independence procedures that this is insurmountable.

‘EY had some reluctance based on their close proximity to the House of Fraser administration which they ran, however as time has passed we do not believe this should be a barrier when a tender process is run.

‘PwC have had some widely publicised fines in recent years and we understand there is a reluctance to engage based on our ownership structure.

‘I would note that we have in the financial year taken on two very skilled, independent non-executive directors to assist us in maintaining a level of challenge and guidance to the executive team. I would also note that companies with supposed strong levels of corporate governance consisting of huge boards, many board meetings and management packs in the tens and hundreds, which the big 4 have been more than happy to audit, for instance Debenhams or Carillion, have been shown to be seriously lacking in what should be important to investors, and indeed auditors, transparency, true and fair accounts, and realistic communications and expectations to the market. We adhere to our core principles in our dealings with investors and the market in general, namely being conservative, consistent and simple.’

SDG also stressed that the ongoing FRC investigation related to Grant Thornton’s audit of financial statements for year end 2016.

The SDG report stated: ‘There have also been inaccurate reports that Sports Directs 2018 year end accounts were being investigated, we reiterate that it was the audit of the financial statements by Grant Thornton and not the preparation of accounts by Sports Direct that were being reviewed, not investigated, by the (FRC) Audit Quality Review Team.

‘We would also note that FRC's Audit Quality Review team review on rotation which is a normal part of their procedures and we understand the Sports Direct audit has not been picked for any other reason.’

The group is  after a spate of acquisitions, with the future of the House of Fraser chain still under review and more store closures planned, and the October 2018 acquisition of Evans Cycles out of administration last October. In the prelims, SDG stated that its mission statement was ‘to become Europe's leading elevated sporting goods retailer’.

Tax dispute

The company is also disputing a tax bill with the Belgian authorities. This relates to a €674m (£607m) tax charge, including 200% penalties and interest, relating to the tax treatment of goods being moved intra-Ggroup throughout the EU via Belgium.  SDG said that the ‘payment notice is not a formal tax assessment but a "proces verbal" whereby the Group will enter a "fiscal mediation" in order to respond to the tax authority’s questions and provide them with documentation’.

It added that ‘management believe, as at the date of signing of the financial statements, that it is less than probable that material VAT and penalties will be due in Belgium as result of the tax audit’.

The latest audit fees are not confirmed as yet, but according to the 2018 annual report, Grant Thornton earned £1.2m in audit fees and audit-related fees for year end 2018, with an additional £100,000 for non-audit services, bringing total fees to £1.4m. This was significantly down on 2017 year end fees for Grant Thornton as the firm stopped providing non-audit services, including tax advice, accounting for £2.8m a year, and a further £1.3m in fees for corporate finance services provided to SDG. The pure audit fee has remained more or less flat at 

Report by Sara White| 29-07-19

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