Tesco accounting scandal prompts FRC to scrutinise retail sector audits

THE UK’s audit and reporting watchdog is to scrutinise the relationship between retailers and suppliers following the Tesco accounting scandal in which the retailer overstated its first half profits by £250m.

The FRC, which has already launched an investigation into Tesco’s accounts after the supermarket giant misstated payments from suppliers, said it plans to make the retail sector a priority sector for audit inspections this year.

Paul George, the FRC’s executive director of conduct, said the events at Tesco “did have an influence” on its decision but that more retailers than Tesco are involved in complex suppler arrangements.

“Given the focus in recent months in respect of supplier arrangements, food, drink and consumer goods manufacturers and retailers have been designated as a priority sector. These inspections will pay particular attention to the extent to which the audit team has challenged and corroborated the appropriateness of how complex supplier arrangements are accounted for,” it said in its annual audit review.

The annual review audit quality in the UK, which inspected 109 private sector audits, found that overall quality had improved but that further improvement is required.

According to the FRC, 67% of audits inspected for the year ended 31 March were found as either good or only in need to limited improvement. Nevertheless, a third of all audits inspected failed to meet the FRC’s standards while ten audits required significant improvements.

Entities outside the FTSE 350 were found to most likely show a need for significant improvement in their audits, the FRC said.

“The FRC recognises that smaller companies have less resource to put into the preparation of their financial statements and this can make the audit more difficult. However, investors consistently say they rely particularly heavily on the quality of reporting in smaller listed companies given the absence of other analysis,” it said.

It also plans to inspect a number of first year audits to assess the extent to which changes in auditors have an impact on audit quality.

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