“`html
WHSmith Faces Regulatory Scrutiny Over Accounting Errors and Profit Overstatement
The UKS Financial Conduct Authority (FCA) is investigating accounting discrepancies at bookseller and stationer WHSmith,adding to pressure on the company following the recent resignation of it’s chief executive.The regulator’s inquiries center on potential breaches of UK disclosure rules related to overstated revenues and profits at the retailer’s US business.
The FCA’s increased scrutiny follows WHSmith’s declaration last week that an independent review revealed revenues and profits had been overstated for the past three years. A spokesperson for the FCA confirmed to the Financial Times that they are “aware of the reports and we are engaging with the firm,” but have yet to determine whether to launch a formal inquiry. WHSmith, for its part, stated it “will co-operate with any regulatory enquiries arising following last week’s announcement.”
The core of the issue lies in how WHSmith booked payments received from suppliers for promotional activities.The company disclosed in August that these payments were recognized as income prematurely. This misstep has triggered a significant downward revision in profit expectations for its North American operations. Trading profit is now projected to be between £5 million and £15 million, a substantial decrease from the previously reduced guidance of £25 million set in August, and substantially lower than earlier market expectations of £55 million.
Furthermore, WHSmith anticipates a retrospective £13 million reduction in its 2024 supplier income and a £5 million cut to its 2023 income, with some of the latter to be accounted for in future financial years.
This situation echoes past accounting scandals involving major UK companies. In 2014, Tesco revealed it had overstated profits by £326 million due to similar practices – accelerating the recognition of commercial income and delaying the accrual of costs. The FCA subsequently required Tesco to offer approximately £85 million in redress to investors and levied a £129 million fine as part of a deferred prosecution agreement with the Serious Fraud Office.
The FCA’s response to disclosure rule breaches varies. While supervisory actions are common, more serious cases of misleading public announcements can result in substantial fines or even criminal charges against company executives.Recent examples underscore this point: in 2022, two former executives at IT provider Redcentric were imprisoned for false accounting and misleading statements, and three former executives of collapsed construction firm Carillion were collectively fined £874,200 for similar offenses. Those Carillion executives are currently appealing their fines, with a hearing scheduled for February.
The regulator’s actions aren’t limited to penalties. Earlier this year, the Upper Tribunal reduced fines imposed on two former Metro Bank executives for breaching listing rules related to inaccurate loan and asset data. The FCA also publicly censured Carillion, stating it would have imposed a £37.9 million fine had the company not already been in liquidation.
Adding another layer of complexity, the Financial Reporting Council (FRC), which regulates the accounting profession, is now considering a formal investigation into PwC, WHSmith’s auditor since 2015. Notably, PwC also served as the auditor for Tesco and Redcentric during their respective accounting disclosure errors, raising questions about potential systemic issues.
The unfolding situation at WHSmith serves as a stark reminder of the importance of accurate financial reporting
