March 12 FRC Statement
March 2 Closure of FCA Investigation
January Deloitte Resignation Letter
December Appointment of New Auditor
November Restated 2019 Results
March 2020 Announcement
Car dealerships operator Lookers is facing further scrutiny over its finances as the U.K.’s accounting regulator opened an investigation into Deloitte’s audit of Lookers, ten days after the Financial Conduct Authority, or FCA, closed an investigation into Lookers for “possible mis-selling of regulated products” between 2016 and 2019. Continue reading for our EMEA Middle Market team's update on Lookers, and request a trial for access to our analysis and reporting on hundreds of other stressed, distressed and performing credits.
The Financial Reporting Council, or FRC, announced today that it has opened
an investigation into audits carried out by Deloitte of Lookers’ financial statements for the years 2017 and 2018.
Lookers has previously faced questions over its financial statements and the car retailer said in March 2020
that it had uncovered “potentially fraudulent transactions in one of its operating divisions” and then in November 2020
unveiled that it had overstated its profits by a total of £25.5 million over several years.
“A total of £25.5m of non-cash adjustments are necessary to correct misstatements in PBT over a number of years,” the company had said in its 2019 results restatement announcement in November 2020.
Following the admission of potential fraud in March 2020, accountancy firm Grant Thornton launched an investigation into the group’s accounting practices. The investigation
identified a “a number of fraudulent expense claims” and “overstatements in profitability.”
Deloitte announced in June
2020 that it would resign as auditor of Lookers after the publication of the 2019 results. Accountancy firm BDO took over
as Lookers’ auditor in December 2020.
Timeline of Events
In December 2018, Lookers’ board commissioned an independent review of the regulated sales activities within its subsidiary Lookers Motor Group Ltd. which was shared with the FCA.
The FCA announced on June 20, 2019, that its Enforcement division would carry out an investigation into regulated sales processes between the period of Jan. 1, 2016, to June 13, 2019.
On July 5, 2019, the FCA informed Lookers that it intended to issue requirement notices for reviews into the group’s governance and systems and controls. Grant Thornton was appointed to perform the review.
On March 10, 2020, the group announced
an investigation into potentially fraudulent transactions. The investigation carried out by Grant Thornton identified accounting irregularities including certain financial systems and controls weaknesses, noncompliance with the group’s accounting policies or accounting standards and poor accounting practices.
In its revised 2019 results
published on Nov. 25, 2020, Lookers announced that it overstated its profits by £25.5 million over the past few years and restated its 2018 and 2019 results.
Following the publication of Lookers’ 2019 results, Deloitte resigned as the group’s auditors.
In its resignation
letter, Deloitte said: “as part of our 2017 and 2018 year end audits, we reported to the Board of the Company a number of recommendations for actions related to the financial controls of the Company, which the company committed to undertake. During our audit for the year ended 31 December 2019 we assessed the Company’s progress as falling short of what was committed, and what was expected to be in place by this date.”
Accountancy firm BDO took over as the group’s auditors in December 2020
and in January Anna Bielby was appointed
as interim CFO.
On March 2, the company announced
that the FCA had closed the investigation without applying any sanctions against the group, “however, the FCA made its concerns clear regarding the historic culture, systems and controls of the Group.”
Today, the FRC announced
it will open an investigation on the audits carried out by Deloitte for Lookers’ financial results for the years ended 31 December 2017 and 2018.
Lookers declined to comment on the FRC’s investigation.
Deloitte told Reorg that: “We take this investigation seriously and are fully cooperating with the Financial Reporting Council. Audit quality is our priority and we are committed to maintaining the highest professional standards.”
Recent Financial Results
According to the group’s most recent financial statement
for the first half of 2020, Lookers’ revenue in the first half of 2020 was £1.563 billion, down 40% year over year due to Covid-19 related closures of large parts of the group’s business during the period. Underlying pretax loss amounted to £36.1 million compared with £22 million profit a year earlier.
A summary of key figures is below:
The group said its ongoing operational restructuring is progressing, with a further 12 sites identified for closure and completed. The group currently operates from a portfolio of 140 dealerships following 27 site closures over the course of 2019 and 2020.
For the second half of 2020, the group said performance was underpinned by outperformance of the retail U.K. new car market, continued resilient trading in used and aftersales and increasing used car margins. The second half performance also includes the early impact of the group's restructuring program. The group expects second half performance to be ahead of the previous year, largely offsetting the first half underlying pretax loss of £36.1 million.
Net debt at the end of 2020 was about £45 million, driven by net proceeds of £17.4 million from a disposal of a number of properties in 2020. Net debt at the end of June 2020 was £11 million.
The group has reduced its RCF to £238 million from £250 million following the sale of certain properties. The group said it continues to have strong liquidity headroom and refinancing conversations with the group's banking club are ongoing.
Looking forward, the group said it expects Covid-19 to continue to disrupt its operations in 2021.