KPMG, PwC face FRC probe over Eddie Stobart Logistics

The Financial Reporting Council (FRC) has launched two investigations into the audits of Eddie Stobart Logistics, one looking at KPMG’s work for the year ended 30 November 2017 and the other examining PwC’s auditing for the year to 30 November 2018  

The investigations will be conducted by the FRC’s enforcement division under the regulator’s audit enforcement procedure.

In August last year Eddie Stobart Logistics suspended trading of its shares on AIM, announced its CEO was to stand down with immediate effect, and delayed publication of its interim results.

The moves followed the discovery of a £2m accounting error by newly appointed CFO Anoop Kang.

In February this year, a new management team released restated half-year results for the period to May 2019 and said ‘profits were significantly impacted by previously communicated accounting-related matters’.

The restated accounts included a £169.2m impairment charge and reported operating losses of £11.6m.

Half year revenues for the six months to 31 May 2019 were £421.3m, compared with £334.5m, restated, in the same period in 2018.

Underlying earnings before interest and taxes was booked as a loss of £11.6m, compared to the restated figure of a £600,000 profit in 2018.

Adjusted loss before tax was £16.5m, compared to the restated 2018 loss of £1.9m in the period and statutory loss before tax was £199.8m (2018 restated: loss of £15.1m).

Adjustments to audited accounts for prior financial periods have also been required, reducing consolidated net assets at 30 November 2018 by £85.1m.

In its update at the time, the haulage company also noted it had made changes to its accounting for property-related activities.

Historically, the group had entered into combined lease and property consultancy transactions with third parties where they provide consultancy services and advice to companies with whom they also enter into long-term lease commitments.

At the conclusion of the consultancy services and the inception of the lease, the group typically receives a large payment.

Under the previously adopted policies, having demonstrated the on-going lease terms were considered to be at or below market value, the group attributed all the consideration received to property consultancy services. 

Having reconsidered the accounting guidance, Eddie Stobart Logistics said it noted the difficulty in benchmarking the revenue recognised on consultancy services provided with market transactions for similar services.

Conversely, the guidance for accounting for lease incentives received requires they are amortised over the life of the lease without reference to whether the resulting lease charge (net of incentives) represents a market rate.

Consequently, the group determined that a more appropriate way to account for these combined lease and consultancy services transactions would be to treat all the consideration as a lease incentive and allocate no revenue to consultancy services. 

Approximately £17m and £33m derived from those activities for financial year 2017 and financial year 2018 (respectively) and approximately £13m prior to financial year 2017 has been reversed and restated, and the amount related to these activities recognised over the life of the lease.

This resulted in a reduction in previously reported earnings before interest and taxes in those years and a net adjustment to Eddie Stobart Logistics’ net assets at 30 November 2018 of £60.6m, exclusive of any estimated tax reduction.

This also means that in future years, recognised lease costs will be lower by approximately £4m per annum, reflecting the benefit of the amortisation of lease incentives on unexpired leases entered into in the past.

Headquartered in Warrington, Eddie Stobart Logistics operates around 2,500 vehicles, 4,000 trailers and 26 distribution centres throughout the UK and Europe, providing its services to a range of national and international customers.

PwC took over from KPMG as the company’s auditor follow a formal tender process in 2018.

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