The Financial Conduct Authority (FCA) has launched preliminary inquiries into high-street retailer WHSmith following a significant accounting blunder that erased nearly £600 million from the company's stock market value.
What Triggered The Watchdog's Interest?
Officials at the UK's financial watchdog confirmed they have started to make inquiries into whether WHSmith breached disclosure rules for listed companies. While this is not yet a formal investigation, an FCA spokesperson stated: "We are aware of the reports and we are engaging with the firm."
The crisis began to unfold in August, when WHSmith was forced to slash its financial forecasts. This came after an accounting error was detected within its North American operations, prompting an independent review led by Deloitte.
The Scale of The Error and Immediate Fallout
The Deloitte review uncovered that profits at the American division had been overstated by up to £50 million. The revelation had an immediate and devastating impact, triggering a 42 per cent drop in share price and wiping the colossal sum from the firm's market valuation.
In the wake of the discovery, the company's chief executive, Carl Cowling, stepped down with immediate effect. He has been replaced on an interim basis by the UK chief executive, Andrew Harrison.
Root Cause and Revised Forecasts
The error was identified as WHSmith was preparing its year-end results. The company stated the issue was "largely" due to recording some income too early. Reports indicate the mistake is linked to supplier arrangements, where rebates are offered for achieving certain sales targets.
This income should have been recorded in the accounts for the next financial year instead of the previous one. Consequently, WHSmith has drastically cut its profit expectations for its US arm for the year to August 31, now forecasting between £5 million and £15 million. This is a stark drop from the £55 million originally predicted by analysts and below the £25 million announced when the error was first revealed on August 21.
