The Financial Reporting Council would not be drawn on whether the mid-tier firm had advised the regulator that it had served notice on the FTSE 250 listed company, following delays in the release of its annual results due to ‘complexities’.  

From a legal perspective, if an auditor resigns, it must notify the regulator, in this instance the Financial Reporting Council immediately, and then the directors of the company would have to appoint a new auditor.

Under section 516, Companies Act 2006 (CA 2006), an auditor of a company may resign their office by sending a notice to that effect to the company. Where the company is a public interest company, the notice is not effective unless it is accompanied by the statement required by s519 CA 2006, which needs to be sent to the directors. This must state the reasons for the resignation. An effective notice of resignation operates to bring the auditor's term of office to an end as of the date on which the notice is received or at a later date as specified.

Grant Thornton has been auditor for 12 years and was appointed by Sports Direct in 2004 initially and continued in post when the company listed in 2007. Grant Thornton is currently facing a FRC investigation over the auditing of financial statements at Sports Direct for year end 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. This investigation is ongoing.

Tax bill delayed results

In the latest development in the long-running results saga, Sports Direct has now issued a statement to the London Stock Exchange clarifying the tax position.

Subsequently it stated that a substantial tax demand from the Belgian tax authorities over intra-group trading had delayed the release of the accounts. The tax demand for €674m (£607m), including 200% penalties and interest, was received on 25 July and since the amount was material to the accounts, Grant Thornton refused to sign off the preliminary results without reassurances from Sports Direct’s tax advisers, Deloitte, and lawyers at law firm RPC.

In a statement to the London Stock Exchange after closing on 29 July, Sports Direct attempted to clarify the situation on the unexpected tax demand, stating: ‘The Notice was brought to Sports Direct's UK management's attention at approximately 12 noon on 25 July 2019. It referred to VAT, penalties and Interest but provided no detail on how these figures had been arrived at or to what they related. It was therefore impossible for Sports Direct to interpret the reasoning behind the Notice at that stage.

‘Within 15 minutes of receipt, the Notice had been sent to one of our UK lawyers, RPC, and from RPC to Laga, the legal affiliate of Deloitte in Belgium. Laga support the Sports Direct group with this matter in Belgium.

‘The management of Sports Direct would like to make it clear that the Notice and subsequent “proces verbal” including the quantum were not expected.’

Sports Direct stressed that its ‘accounting principles include being conservative. No provision or accrual in relation to this matter had been made in the Sports Direct group accounts prior to receipt of the Notice or the proces verbal and no provision or accrual was made when they were received’. ‘The Sports Direct management firmly believe that the points raised in the proces verbal, most of which relate to goods transported through Belgium, can be dealt with through the provision of further documents and information to the Belgian Tax Authority. Contact has already been made with the Belgian Tax Authority in order to deal with this matter.

‘Sports Direct is fully committed to working with the Belgian Tax Authority on this matter. The Sports Direct management has assessed the likelihood of the amounts referred to in the Notice being payable as not probable and accordingly believes that there is no requirement for a material provision or accrual to be made.’

Report by Sara White | 30-07-2019

Further reading: Croner-i

Imgaas - rules and procedures for auditor resignation

Croner-i practical guide to the Companies Act