The collapse of Wilko: Role of EY and PwC

PwC and EY have come under scrutiny for their role in the collapse of the UK retail chain, Wilko.

In the world of retail, the collapse of a major chain can send shockwaves through the industry. Such was the case with Wilko, a well-established high-street stalwart that recently faced financial turmoil and ultimately collapsed into administration.

PwC served as Wilko’s auditor until 2019, after which EY took over. Despite the company’s precarious financial situation, both firms failed to raise the alarm, leading to the loss of 12,500 jobs and the demise of the 93-year-old company.

EY’s inadequate financial modelling

The auditors’ failure to predict Wilko’s financial downfall underscores the importance of accurate financial forecasting and modelling. In Wilko’s case, despite declining margins and a £56m loss in 2018, the auditors did not challenge the directors’ conclusion that the company had the resources to continue operating.

Wilko’s financial troubles were not sudden but rather a culmination of various factors that had been brewing for some time. As early as January of the previous year, the risk of insolvency had been flagged by the company itself.

The warning signs were evident as the firm’s most recent set of annual accounts for the year to January 2022 reported a significant loss of £37.6 million. Wilko’s directors acknowledged a “material uncertainty” about the company’s ability to secure additional funding, casting doubt on its ability to continue as a going concern.

Despite mounting losses and doubts about the company’s financial health, EY, as Wilko’s auditor, agreed with the directors’ assessment and signed off on the accounts. This decision has raised eyebrows and sparked criticism from experts in the field of accounting.

Atul Shah, a professor of accounting and finance, questioned the auditors’ acceptance of the directors’ opinion, emphasising the importance of independent assessment in the auditing process.

The failure to qualify the agreement with the directors’ assessment has been deemed as “bizarre” and has left many wondering about the efficacy of the audit itself.

PwC’s role and responsibility

While much of the blame has been directed at EY, PwC  also faced scrutiny for its involvement in Wilko’s collapse.

The company had been the auditors for Wilko in previous years, and questions were raised about their role in assessing the financial viability of the retailer.

While PwC’s specific actions and responsibilities in relation to Wilko’s collapse are still under investigation, their involvement has added to the overall discussion surrounding the accountability of auditors in such cases.

The fallout and future implications

The collapse of Wilko has had far-reaching consequences, impacting not only the thousands of employees who faced redundancy but also the wider retail industry.

The role of auditors in cases like these is crucial, as they are responsible for providing independent assurance on the accuracy and reliability of financial information. The failures highlighted in the collapse of Wilko raise concerns about the effectiveness of current auditing practices and the need for greater accountability and transparency.

The audit industry has been under close scrutiny since the collapse of outsourcing giant Carillion, audited by KPMG in 2018. David Steinberg, a restructuring expert and partner at Stevens & Bolton, believes that for meaningful change to occur, regulation needs to evolve so that firms, rather than individual practitioners, are regulated.

The Government is under pressure to take action and overhaul audit rules to prevent such collapses and restore trust in the industry.

The collapse of Wilko serves as a reminder of the importance of rigorous auditing practices and independent assessment in the world of finance. The involvement of EY and PwC in this case raises questions about their responsibility and oversight.

As investigations into the collapse continue, it remains to be seen what actions will be taken to reform the auditing industry and prevent similar collapses in the future. The lessons learned from this unfortunate event will undoubtedly shape the future of auditing practices and reinforce the need for transparency and accountability in the financial sector.