In an announcement to the London Stock Exchange earlier this week, Staffline confirmed that it had received a letter of resignation from PwC, stating that it was resigning as the Group's auditor with effect from 1 August 2019. PwC had been auditor since 2015.

The Big Four firm was paid £1.8m in audit fees for the year end 2019 audit, described as a one-off exceptional charge due to a refocused audit brief following a whistleblower report into alleged accounting irregularities which resulted in an enhanced audit.

PwC told the company in its resignation letter that it was standing down as statutory auditor as the group was about to start a competitive tender process, although this is standard practice under the competitive audit tender rules. 

However, in the latest annual report and accounts for year end 30 April 2019, released in June 2019, the auditor’s report by PwC, which ran to eight pages, flagged concerns about material uncertainty relating to going concern at the company, citing breaches of a covenant attached to its debt facility and longer term cash flow issues.

The auditor’s report stated: ‘In light of the uncertainties disclosed in relation to future trading results and cash flows, the group has forecasted further covenant breaches for the next 12 months from 30 June 2019 as a result of the increase in net debt and the reduction in underlying profits.

‘The group has received written confirmation from the lenders that the historical breaches have been waived. The forecast covenant breach at 30 June 2019 has also been unconditionally waived. The forecasted breaches at 30 September 2019, 31 December 2019 and 31 March 2020 will be addressed through a relaxation of the net debt to underlying profits covenant for those periods, but this is conditional on the successful completion of the below planned equity raise at a minimum value of £30m within a stipulated timeframe.’

At the time, PwC auditors warned: ‘The group is reliant on the ongoing support of its lenders and that they will continue to make available the currently agreed facilities. The company is reliant upon the group to fund its operations and therefore the above factors are also applicable for the company as a standalone entity.’

The company is also facing an HMRC investigation over non-compliance with National Minimum Wage legislation relating to a five-year period from 2013 to 2018. The company has set aside £15.1m to cover potential fines. HMRC said that it 'cannot comment on identifiable cases'.

The Staffline annual report said that a whistleblower contacted PwC by email in January 2019 ‘raising concerns regarding certain of the group’s practices, accounting and disclosures in relation to payroll and related accruals, including non-payment of amounts due to employees and related accounting entries and accruals’. An ensuing investigation led to the delay of the group’s preliminary results to 30 January 2019.

An investigation was launched encompassing the group, at which time issues over national minimum wage compliance were raised as well as concerns about contractual agreements.

In the annual report, PwC stated: ‘Our extended audit procedures found no adverse findings concerning either the timing of revenue recognition or the VAT liability recorded as at 31 December 2017 or 31 December 2018.’

However, PwC said it had conducted an examination of management’s internal assessments of contractual obligations and ‘identified exceptions based upon our review of a targeted sample of customer contracts. Given this and the further information obtained through the wider procedures we also extended our testing of customer contracts for clauses which may give rise to any material liabilities. This work identified failures by management to fully disclose to us and to account for certain customer claims and other disputes. This has not resulted in any material adjustments.

‘We recommended to management that the contract review process should be enhanced and more detailed reporting of contracts with unusual terms be reported to the board for further monitoring. Staffline are aware of the seriousness of the failure to disclosure information to us in an open and transparent way and are in the process of addressing these concerns.’

In a statement, Staffline said that ‘there was mutual agreement with the audit committee not to participate in this process following the completion of the Company's audit for the year ended 31 December 2018’.

It added that PwC ‘consider[ed] that the matters connected with their resignation that need to brought to the attention of the Company's members or creditors are included within PwC's audit report on pages 62-70 of the Company's annual report 2018’.

In accordance with the requirements of section 520 of the Companies Act 2006, a copy of the statement received from PwC will be sent to all shareholders of the Company.

The Company will commence a competitive tender process for the role of the Group's auditor shortly.

Founded in Nottingham in 1986, Staffline has reported turnover of £1.1bn and two operating divisions. The recruitment division supplies over 60,000 blue collar works a day to around 1,500 private sector clients, while PeoplePlus division is an adult skills and training provider. The company first listed on AIM in 2004.

Staffline annual report

Sara White | 14 Aug 2019