Accounting firm PwC has been criticised for signing off "incomplete, inaccurate and misleading" accounts filed by department store BHS.
The Financial Reporting Council (FRC) found PwC failed on a number of levels when it was responsible for auditing the accounts of BHS before it was sold by Sir Philip Green for £1 in 2015.
The FRC found PwC failed to adequately supervise and review the accounts of BHS before it was sold and there was a risk of "self interest" on behalf of PwC.
PwC was fined £6.5m by the FRC for its auditing of BHS, shortly before its sale, while senior audit partner Steve Denison was fined £325,000.
The FRC's report has now been published after the High Court denied a request by Taveta, the former owner of BHS, to put an injunction on it, to prevent its release.
The report said: "[PwC and Mr Denison] failed to gather any audit evidence on which to conclude that the going concern assumption was appropriate. Based on the audit evidence obtained, they should have concluded that a material uncertainty existed about BHS Group and BHS’s ability to continue as going concerns."
The FRC also found BHS's management assumed the department store's losses would reduce by 10 per cent a year over the next five years.
The report said: "This assumption should have appeared to [PwC and Mr Denison] to be very optimistic given that there was a general trend of increasing losses."
The FRC also found the BHS accounts were reliant on the assumption that Taveta had given an undertaking to provide continuing financial support, but the FRC found there was "no such unqualified undertaking" and that any support relied on the company remaining in Taveta's ownership.
PwC signed off BHS's accounts in March 2015, just a few days before the retailer was sold to Mr Chappell for £1.
In 2014, the Taveta Group paid PwC £355,000 and £2,859,778 in audit fees and non-audit fees respectively.
But PwC’s report to Taveta’s audit committee suggested the figure was even higher, at £3.3m, meaning PwC carried out eight times more non-audit work than audit work.
PwC was also found to have charged Taveta a contingency fee for certain non-audit work, which created "self-interest threats".
The report said contingency fees are a threat to an auditor's objectivity because the auditor may have, or appear to have, an interest in the outcome of the non-audit service.
It added: "The fees generated from this non-audit work risked inappropriately influencing [PwC's and Mr Denison's] judgment or behaviour."
A spokesperson from PwC said it was aware its audit methodology was not carried out during its involvement with BHS and it will be working to "enhance" its monitoring proceedures.
"We are sorry that our work fell well below the professional standards expected of us and that we demand of ourselves," a PwC spokesperson said.
"This is unacceptable and we agreed the settlement recognising that it is important to learn the necessary lessons.
"Our audit methodology was not followed in this instance. We have taken steps to bolster the supervision and review of our audits. We took swift action to enhance our support and monitoring procedures. We have agreed with the FRC to extend these further for an additional period."
The FRC’s report into PwC conduct during its auditing of BHS comes after chairman of the work and pensions select committee Frank Field put pressure on it to publish its findings.
Mr Field said: "At long last, the FRC has published its devastating report on the BHS audit.
"The report describes the most incredible example of complacent audit rubber-stamping one could fear to imagine. No wonder Sir Philip Green and his fellow Taveta directors didn’t want this report ever to see the light of day."
"The FRC has accepted Taveta’s arguments that they were simply 'very optimistic' about BHS’s prospects as a going concern.
"That sounds like a euphemism of the most preposterous proportions. If Sir Philip and his fellow directors really do believe they had proper evidence that BHS was a going concern, then surely they will be happy to put that evidence in the public domain so that BHS employees, pensioners and creditors can judge for themselves."
The Insolvency Service has previously said it may re-open its investigation into the former directors of BHS if new evidence came to light when the FRC report was published.
It had previously reached the conclusion there was insufficient evidence of directorial misconduct to justify disqualification proceedings.
rosie.quigley@ft.com
