PwC is being investigated by the Financial Reporting Council after signing off WHSmith accounts that were later found to contain accounting errors that overstated revenues and profits. The probe will examine the firm’s audit of WHSmith’s 2024 financial statements and whether the work met the standards expected of statutory auditors.
The FRC said the investigation should not be taken as evidence of any breach and does not predetermine the outcome. However, the investigation has focused attention on the controls, oversight and audit work surrounding the accounting errors.
The investigation follows problems uncovered within WHSmith’s North American business. The issue remained undetected until a member of WHSmith’s finance team raised concerns about the treatment of supplier payments. Deloitte later concluded that certain promotional payments had been recognised too early, inflating reported revenues and profits over several years. PwC audited and signed off WHSmith’s accounts during the period in which the overstatements occurred.
Why Regulators Examine Audits
The FRC’s investigation will focus on the audit work carried out in relation to WHSmith’s 2024 accounts and whether it met the standards expected of statutory auditors.
UK auditing standards require auditors to identify and assess risks of material misstatement, maintain professional scepticism throughout an audit and perform procedures designed to obtain reasonable assurance that financial statements are free from material misstatement. Revenue recognition is often treated as a higher-risk area because errors and manipulation can affect reported financial performance.
Responsibility for preventing and detecting fraud rests primarily with management and those charged with governance. Auditors are expected to test and challenge financial information, but auditing standards recognise that audits have inherent limitations and cannot guarantee that every problem will be identified.
From Accounting Error to Regulatory Investigation
Former chief executive Carl Cowling stepped down after the accounting errors came to light, while the Financial Conduct Authority is conducting a separate investigation into potential breaches of UK listing and transparency requirements.
Deloitte’s review of the North American business identified a target-driven culture, weaknesses within the finance function and limited oversight of certain financial processes.
The fallout has extended beyond the original reporting errors. Alongside the FRC investigation into PwC’s audit work, WHSmith has faced regulatory scrutiny, management changes and pressure to rebuild investor confidence.
PwC has said it will fully cooperate with the investigation and reiterated its commitment to delivering high-quality audits. The FRC’s inquiry will examine the firm’s audit of WHSmith’s 2024 financial statements under its Audit Enforcement Procedure.
The regulator has not made any findings and has stressed that opening an investigation does not indicate that any breach has occurred. The inquiry will examine whether the audit work met the standards expected of statutory auditors.