Grant Thornton has told regulators it intends to quit as Sports Direct’s auditor following concerns over the disclosure of a €674m tax bill, in a move that would pile more scrutiny on to the corporate governance of Mike Ashley’s business.
The firm, which has audited Sports Direct since it floated on the London Stock Exchange in 2007, is set to resign after the troubled retailer’s annual general meeting in September.
Grant Thornton made the decision to walk away from the company, one of its largest listed audit clients, after it was informed by Sports Direct of the significant tax liability just hours before it was due to sign off on its annual accounts, according to two people with knowledge of the matter.
The Financial Reporting Council, the audit watchdog, has been informed of its plans, the people said.
The resignation could leave one of the UK’s most high-profile listed companies struggling to appoint an auditor after it admitted in its annual results last week that it had not persuaded rival accounting firms to tender for its audit contract.
The retailer’s shares dropped sharply on Monday after the tax disclosure debacle late last week, alongside concerns about trading in its core business. The company was forced to delay the publication of its earnings by 10 hours and eventually revealed that the reason for the delay was a €674m Belgian tax demand that came at “the eleventh hour”.
Chris Wootton, incoming finance director, said Sports Direct considered the tax demand “without merit”, adding: “We’ll tackle it, we’ll handle it, it’ll go away.”
Jon Kempster announced on Friday evening, when Sports Direct finally announced its results, that he was he was quitting as finance director. His departure follows several others in recent weeks, including head of retail Karen Byers and company secretary Cameron Olsen.
Grant Thornton is under scrutiny from the audit regulator for its work for Sports Direct. The FRC is investigating why Grant Thornton did not disclose payments made by Sports Direct to a company run by Mr Ashley’s brother as a related party transaction in the accounts. The FRC’s audit quality review team is also looking into how Grant Thornton valued Sports Direct’s holding in Debenhams before its near collapse in June.
Sports Direct said in its results that it had held “early discussions” with the Big Four accounting firms over a possible tender process to replace Grant Thornton. It revealed that KPMG, Deloitte and EY had told the company they were conflicted from auditing the business, and PwC had a “reluctance to engage based on our ownership structure”.
BDO, a mid-tier accountant, ruled itself out of a proposed tender process last year, citing reputational risk. Mazars, another challenger firm, approached Sports Direct about becoming its next auditor but with a number of conditions around governance.
Asked about the auditors at its results presentation, Mr Wootton said Sports Direct had a “rolling letter of engagement” with Grant Thornton, but that “you would have to ask them” if the firm would continue to audit the group.
Under UK rules, the Department for Business has the power to make an appointment if a company cannot appoint an auditor. The lack of an auditor would be another significant problem for Mr Ashley and his tight-knit team of top executives.
Sports Direct has lost £150m due to Debenhams going into administration, while House of Fraser lost £54m in its first full year of Sports Direct ownership. In its core sportswear business, refurbished stores have not attracted the level of support from third-party brands that it hoped for.
Sports Direct, Grant Thornton and the FRC declined to comment.
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