Business and Trade Committee
Oral evidence: The collapse of Wilko, HC 316
Tuesday 28 November 2023
Ordered by the House of Commons to be published on 28 November 2023.
Members present: Liam Byrne (Chair); Douglas Chapman; Jonathan Gullis; Antony Higginbotham; Jane Hunt; Ian Lavery; Andy McDonald; Mark Pawsey; Sir Stephen Timms.
Work and Pensions Committee member present: Nigel Mills.
Questions 1-42
Witnesses
I: Patrick O’Brien, Global Retail Research Director, GlobalData; David Steinberg, Partner, Stevens and Bolton; Nadine Houghton, National Officer, GMB; Professor Atul Shah, Professor of Accounting and Finance, City University.
Witnesses: Patrick O’Brien, David Steinberg, Nadine Houghton and Professor Atul Shah.
Q1 Chair: Welcome to this morning’s session of the Business and Trade Select Committee, in which we are looking at the collapse of Wilko and the lessons for policy reform in the Department for Business and Trade. Thank you very much to those witnesses who are joining us for the first panel. Our goal with this first panel is to set the stage for the later hearings that we have that follow you. Because time is so limited, we are asking for really concise and punchy answers. As you can imagine, we are briefed up to the nines, but we would be grateful to you for helping make sure that we have all the facts on the table before we move into our subsequent hearings.
Nadine Houghton, perhaps I could turn to you first. Tell us very briefly, if you can, why Wilko failed and who, if anyone, was responsible. Then I will put the same question to Mr O’Brien.
Nadine Houghton: GMB does not believe that the collapse of Wilko was inevitable. We think that what brought about the collapse was weak leadership and a failure of Wilko to adapt to a changing market. The consistent face on the leadership team was, of course, Lisa Wilkinson, who you will be speaking to later. We believe that she bears a significant amount of responsibility. Under her directorship, we saw a high churn in executive directors and no CEO for a period of at least eight years.
During this time as well, huge amounts of dividends were taken out of the business, £77 million over the past decade. Millions were taken out by Lisa Wilkinson and used for her angel investments instead of, as we would believe they should be, being invested in Wilko to improve Wilko, to improve its online offering, make sure it was competitive on price, and make sure that its shops were fit for purpose. It had a lot of high street stores when its competitors were moving on to retail units. It is those kinds of changes that Wilko really did not adapt to.
Q2 Chair: We have failures there of strategic and operational leadership and some financial issues, but encapsulated by a failure of leadership at the business.
Nadine Houghton: There was a failure of leadership and a lack of accountability.
Q3 Chair: Patrick, what is your take on that question?
Patrick O’Brien: My take is that Wilko’s demise has to be seen in terms of a longer-term competitive context. The retailer was doing quite well up until about 2012, but has really struggled over the last 10 years. This is not a problem that has just happened over the last couple of years or indeed because of Covid or the cost of living crisis.
It is a longer-term issue and it has come up against much stronger competitors. That is in terms of supermarkets, which have pushed more into home sales. They have increased from 2% of their sales mix to over 3%. Then there is the competitive context of the likes of Home Bargains and B&M, which have grown very rapidly with a much more compelling offer than Wilko has had. They grabbed market share from Wilko, as have other players, such as Savers and, to a lesser extent, the likes of Hobbycraft and Dunelm also in homewares. It has been attacked from all sides.
It seems to me that there was a sense of inertia at Wilko. It did not do enough. It had the wrong store locations and the wrong store types. Its stores were far too big. It had lower sales densities than any of its major competitors and did not react. It kept on with a high street model. It did not really push into retail parks at all. That was where the likes of B&M and Home Bargains were having their successes.
Q4 Chair: How long did that inertia last if you were to track it back over the last however many years?
Patrick O’Brien: It ran out of room in terms of like-for-like sales growth in 2012. Its operating margin never recovered beyond 1.7% over the last 10 years, when its competitors were much higher. It did not react at all, as far as I can see.
Q5 Chair: It was in a pretty unique position in 2009, after the collapse of Woolworths, to help consolidate that particular sector of the market though. Is that fair to say?
Patrick O’Brien: That is true. It grew all through the early 2000s. It was one of the reasons that Woolworths eventually collapsed. It was growing stores all the way through until about 2014, maybe 2015.
Nadine Houghton: We have correspondence between ourselves and Wilko where it identifies a challenging trading position from about 2010. It identifies that the discount retailers are an issue. However, we see that it does not lean into that and accept that that is a challenge that it is actually very well placed to adapt to, as you have identified, in this post-Woolworths austerity economy of 2009 and 2010. You see a move away from this idea of Wilko as a value retailer, a discount retailer. It has this rebranding process, which is completed in 2015, where it moves from Wilkinson to Wilko.
I represent team members within Wilko. The internal messaging to our members was very much that there was this attempt to move to almost a John Lewis-type model. That was the internal messaging that our members on the shopfloor got. It was a complete departure from the idea of Wilko as a family brand and a discount retailer.
Under NDA in December 2022, we raised our concerns with the then CEO, Jerome Saint-Marc, that Wilko was moving away from its roots and doing what it had done well for so many years. He unequivocally told GMB that Wilko was not a discount retailer. Our members chart the beginning of the end from around 2014 and 2015, where it moves away from this discount approach.
Q6 Chair: If we go forward a couple of years to, say, 2021, the cash position in the business remains very strong. It is recording about £107 million in net cash in 2021. When were you told as a trade union that there were problems at play?
Nadine Houghton: We were not really ever directly told. We were told that there were trading difficulties.
Q7 Chair: You were not told at all.
Nadine Houghton: No. The consistent message that we had from Wilko was, “We are in a strong position. We are in a strong cash position”—as you have said, it preserved a lot of cash in the bank—“but we have a turnaround plan. We recognise that there are difficulties, but we have a turnaround plan”. The strapline was “Power to 2030”.
We were consistently told, “We have this robust turnaround plan. We have lots of cash in the bank. There is nothing to see here and nothing to worry about”. It was not until there was lots of press speculation around the middle of 2022 that we asked for this meeting with the then CEO, Jerome Saint-Marc, to be told again, “There is no problem here. We are not a discount retailer. We have a plan”.
Only a matter of weeks later, a new CEO was appointed, who you will be speaking to later, Mark Jackson, and he actually seemed to have a plan. He seemed to understand what it is that Wilko needed to do in order to survive. Unfortunately, it was too little, too late. We found out as well, from press speculation unfortunately, that the Wilko board was advised that it needed to enact a CVA in the middle of 2022 in order to bring its rents down. Again, there was this inertia and inaction when something clearly needed to be done.
Q8 Chair: You are under parliamentary privilege here, but I think that you have also been released from an NDA.
Nadine Houghton: We have, yes.
Q9 Chair: What did you learn from that that you can now share with us?
Nadine Houghton: We learnt what I have just told you. There was not a high level of detail. The meeting that we had with Mark Jackson was also under NDA and that was in the January. At that time we were told that the rents were 40% above market rates.
We have this picture where the board has been advised in 2022 that it needs to enact a CVA. I am sure you will ask Lisa later on why that was not acted upon. We then have a meeting with the CEO, who tells us, “Everything is fine. We have a strong cash position”. Then, come January 2023, the new CEO is telling us, “Actually, our rents are 40% above market rates. Yes, we have a turnaround plan”, but clearly, as we all know, it was too little, too late.
Q10 Chair: We have a failure to consolidate after the collapse of Woolworths. We then have a rebranding exercise after 2014, which is about the time that the business was bought out by Ms Wilkinson. We then have, frankly, a slow decline in which problems appear to snowball, but there was not a lot of transparency about those problems with you and others.
Nadine Houghton: There was no transparency, but no acknowledgment of the issues. There was no humility from anybody at a board level to be able to sit back and go, “Our strategy is not working. The discount retailers are hugely eating into our market share. We were in a prime position to capitalise on that. Okay, we missed our chance there, but what do we need to do differently now?” You see this real digging in. I have mentioned the John Lewis-type model. That sort of culture persists and you see that in the director churn as well.
Q11 Chair: Do you think that the board of Wilko was in denial or did it just not care?
Nadine Houghton: I can only tell you what I pick up on anecdotally from feedback from our members. The feedback from our members is very much that Lisa Wilkinson had an idea about how she wanted the business to be run. You see the opening of the High Street Kensington Wilko. If that does not speak to a vanity project, I am not really sure what does. You have this W’Innovate extension added to the head office on an industrial estate in Worksop. Again, it just looks like a vanity project. It is completely out of place. You see, for example, the investment in these driverless drones as part of Lisa’s angel investment strategy. It was very much that Lisa had an idea about what Wilko should be, but it was a complete departure from what Wilko is and had always been and done well.
Q12 Mark Pawsey: We have heard about leadership and failure to understand the market. I want to ask Professor Shah, if I may, about the financial aspects of Wilko. You are an expert in accounting and corporate governance, and regulation also. I wanted to pick up those two bits separately. In terms of accounting and corporate governance, why were these things not picked up by the auditors?
Professor Shah: That is a very good question. That is what I have been asking while looking at the accounts. PricewaterhouseCoopers were the auditors before 2019 and EY took over in 2019. These problems have been building up for some time, as my colleagues have just said. It is very simple, in a way, for an auditor to recognise the problems. It is not difficult, because the turnover is high but the margins are very low and declining. There was a big loss in 2018 of £56 million. It is in 2019 that PwC resigned as auditors.
I am a member of the Institute of Chartered Accountants in England and Wales. We have a duty to protect the public interest. We are trained to spot these kinds of problems. We are supposed to bring our expertise. We are supposed to be independent.
Q13 Mark Pawsey: What went wrong?
Professor Shah: What went wrong is basically that the auditors did not do their job. If we look closely at the audit opinions, while PwC was an auditor, there is a section in the audit opinion called “Going concern”. In that section, the paragraph reads that this company is a going concern and everything is fine. However, the last sentence says that they cannot guarantee the future of the company because of the uncertainty that surrounds it.
Q14 Mark Pawsey: Is this both auditors? Is this PwC in the period prior to 2019 as well as EY after? Two of the big four failed to do their job properly. Is that what you are telling us?
Professor Shah: Yes, without any doubt. If you look carefully at the way they phrased the audit report, they protected themselves. We are hearing just now about how the family who owned the business protected themselves at the expense of the workers. Here you have auditors protecting themselves.
Q15 Mark Pawsey: Tell us how they went about doing that? How were they able to protect themselves and not protect the workers, customers and suppliers of the business?
Professor Shah: In the last audited accounts in 2022, when EY was the auditor, the normal period of audit is three months after the month end. EY waited for nine months, which is the last deadline to publish the audit report.
Q16 Mark Pawsey: Why do you think that it did that?
Professor Shah: It was clearly because there were serious problems. By coincidence, it so happens that the headquarters in Worksop, the distribution centre, was sold for £50 million the day before the audit report was signed. The cash injection that that brought in was able to keep the organisation going.
Q17 Mark Pawsey: We heard that in 2021 the cash position was strong. Why did it deteriorate so quickly and what was done to deal with it? It was the sale of the building, presumably.
Professor Shah: We only have public information. The auditors have a lot of inside information. From the public information, I can discern that Barclays have a loan, a kind of working capital loan, of about £25 million. It was calling for that loan back and the cash was very short. It was forced to make a sale of one of its core buildings, properties. Out of that sale, effectively, the auditors took comfort that, temporarily, there was a reprieve.
When you read the audit report, there is a statement where they say that there is a material uncertainty relating to going concern, but then overall it says that the accounts give a true and fair view of the group’s affairs. If a company is insolvent, the whole accounts change completely, because the valuations change. In a sense, when you look at the audit report, it is a bit like it has passed, but it has failed, but it has passed again, and it has failed. When you are reading it, you are not getting a very clear indication of what the judgment about the future of the company is.
Q18 Mark Pawsey: What should the auditors have written? What should they have said that they did not say?
Professor Shah: They should have said that the accounts do not give a true and fair view, and not just in 2021. They should have said that at least three years earlier.
Q19 Mark Pawsey: When an auditor sees accounts that do not give a true and fair view, what action should it take? To be fair to PwC, it resigned. Is that not adequate action?
Professor Shah: No, not at all.
Q20 Mark Pawsey: What should they have done?
Professor Shah: They should have reported it in the audit report. That is when they express the opinion. We hire experts—remember these experts are very well paid—to provide judgment and independent analysis and to help with the corporate governance of a public company. They failed in doing that, clearly, but they covered themselves. In a court of law, they would not be able to be sued because of the way they phrased the opinion.
Q21 Mark Pawsey: Would EY have taken on the audit role if it had realised what the serious state of the company’s finances was?
Professor Shah: That is a very good question. This very Committee did a fantastic report on the future of audit in 2019, which covered all these aspects. One key recommendation made by this Committee was that auditors have a duty to look forward, not just backward. They need to exercise clear judgment and be independent.
If you look at the last audited accounts, the directors created projections for the cashflow of the business and the auditors said, “There is uncertainty surrounding the business but we have looked at the cashflows and feel that the business will survive for another year until 2024”. This Committee’s The Future of Audit report said that the public should expect much better than that of these independent professionals, so they did not get it.
Q22 Mark Pawsey: How important do you think that reform is?
Professor Shah: It is long overdue. There have been fantastic reviews. The Brydon report looked at the audit profession in detail and the changes to the audit report in detail. It was beautifully done, very professional. All of these reports have been put into abeyance.
The profession is not independent. The Institute of Chartered Accountants in England and Wales, which is the main audit professional body, provides templates for the audit report. Auditors, effectively, do not have to really write the audit report. They just take a template out.
Q23 Chair: Mr McDonald is going to ask about some of the systemic issues. I just want to check one thing. If the company was bleeding so much cash in 2021 and 2022 that Barclays was recalling its loan, it sounds like a gap was plugged at the very last minute by the sale of the distribution centre in Worksop. If you are plugging gaps with a one-off sale, that is not a going concern.
Professor Shah: Yes, absolutely. Remember that the auditors delayed the audit report by six months.
Q24 Chair: That was presumably in order for the sale of the distribution centre to come through and the cash to arrive.
Professor Shah: Yes, exactly. That is also not very professional. If their duty is to protect the public interest, they should be timely and willing to exercise judgment and take risk. Otherwise what is their job? What is their job?
Q25 Andy McDonald: Professor Shah, can I develop that theme somewhat? When we look back at BHS in 2016, Carillion, Patisserie Valerie, London Capital & Finance, Thomas Cook, NMC Health and Greensill Capital, they all demonstrate major audit failures. There has been heavy criticism of the big four and others involved in those. You have argued that those failures are linked to systemic failures in corporate governance. You have called for audit reforms. Do you want to say a little bit more about those key reforms? Can I invite you to comment on the market being dominated by such a small cohort of auditors? I understand that France has 27 players in this market and double auditing. What are the reforms that you would want to see and which are the urgent ones?
Professor Shah: There is a long list, but I will start with the independence issue. At the moment, these are broad-based. The big four are, as you rightly say, very large. They have a large market share and are very influential. Also, they provide a whole A to Z of services, so there are plenty of conflicts of interest. Just looking at the Wilko example, PwC was the auditor, and then it resigned. Then it became a consultant to Wilko, so it was helping them with the restructuring. There is a £500,000 bill that was unpaid at the time of the administration. Now, suddenly, from that, it has become the insolvency practitioner.
Then I saw that Deloitte is also a creditor on this. The big four are helping Wilko in different ways. We found the same in Carillion. All the time, where is the public interest? Where is the independence? The independence should be separated. They should not be allowed to cross‑sell services and they should be separated. Audit should be separated and they should be broken up. Those are simple examples.
Another important thing is about the forward-looking aspect of the audit. It should not just be about the past. It should be about the future and not just one year into the future but at least three to five years. The Brydon review covers that. There is also this talk about the auditors not being appointed by the company, because the company is not the client. The client is the public, the shareholders and the creditors. There is a whole range of stakeholders who rely on a good-quality independent audit. Therefore, there is talk about the public appointment of auditors, so the Government appoint the auditors to different companies rather than them choosing their auditors.
There is the point that was raised earlier about the transfer between PwC and EY. For that transfer of auditors, the only requirement is that one auditor should write to the other to make sure that there are no unforeseen risks in the business that the other auditor should be aware of, but that is a secret letter. Brydon said that that letter should be made public. Whenever there is a transition of auditors, we should see that. Auditors should appear in front of the AGM. At the AGM, people can ask auditors to look at particular aspects of the business that are not covered but seen to be risky by the stakeholders of the business, the kinds of issues that Nadine is talking about.
Q26 Andy McDonald: You are saying that that does not happen now.
Professor Shah: No, not at all.
Q27 Andy McDonald: We have an issue that not only are the same people auditors, insolvency practitioners and consultants, but they are investors as well. You are basically telling us that that is simply unsustainable as the architecture in this space.
Professor Shah: Yes, and given that they have such access to internal information about the business on a regular basis that the public do not have. They are supposed to do their job properly, reliably and accurately so we can be protected, jobs can be protected and creditors can be protected. There are so many small creditors who lost out.
Andy McDonald: Given that, what is your take on the Government’s response to this? It is not a new area to us. This has been known. Is the current legislative framework sufficient, or is that needing urgent overhaul? What is your sense of Government’s response to those appeals and the urgency with which this is being treated?
Q28 Chair: Were you as surprised as some of us that there was nothing on this in His Majesty’s speech?
Professor Shah: I was surprised, but actually not in a way. We live in a corporately captured economy, basically, where big business is controlling our democracy. It has huge power and influence over our elections, and that is why we are where we are. I feel that it is completely unsustainable. While we are talking about net zero and sustainability, how can we run a democracy in an economy run by multinational corporations that are not accountable to anybody? It is just not possible. In fact, net zero should mean net zero for multinational power, arrogance and abuse of power. That should be reduced and they should be made accountable.
Q29 Andy McDonald: Finally, I mentioned a different architecture in France because that has been brought to my attention by auditors who cannot break into this market because it is cornered in the way that you have described. Are there other examples where we do not have the Carillions and BHSs collapsing with regularity as we have had from 2016 to the current day? Are there better ways to arrange your auditing and insolvency practices?
Professor Shah: You gave the example of France earlier. The joint audit is a good example. The broader issue is that we have allowed too much power to big business in this country.
Q30 Antony Higginbotham: Mr Steinberg, it looks like you are an expert in restructuring and insolvency. For most people looking in, including constituents I have, and I am sure everyone has, who worked for Wilko, once the insolvency and administration process starts, it feels like things go into a black hole. Lots of people do not know what is going on. Workers do not know whether their jobs are secure. I wonder whether we can start by you explaining the process from when an insolvency process starts. What happens? Who does what? Who is responsible for communicating?
David Steinberg: There are different types of insolvency proceeding. The type of insolvency proceeding that a company selects is largely driven by what they want to achieve next. In the case of administration, for example, the primary objective is to try to rescue the company as a going concern. However, there is then a cascade of subsidiary objectives. If the administrators conclude that they cannot achieve the rescue of the company as a going concern, the survival of the company, there is a sort of shopping list, if you like, of subsidiary achievements, some of which are to achieve a better outcome for the creditors than would be the case in a liquidation or to try to get a distribution to the preferential creditors if that is possible.
They will quickly make a decision, as office holders, as to which of those objectives they think is realistically achievable. They have usually reached that conclusion before they get appointed, particularly if they have been involved with the management before they are appointed, which they usually are. Having concluded what their objective should be, the one they should pursue, they get about doing it.
Depending on the nature of the business, they may have to move very quickly indeed. For example, if they want to achieve a sale of the business as a going concern, they need to move very quickly. In order for the company to be sold as a going concern, it needs to continue as a going concern within administration while that sale is being concluded. That needs money. That needs cash. Obviously, if they do not have the cash available, they cannot pay the employees, the creditors or the suppliers that they are contracting with, so they have to move very quickly. A lot of the criticism about lack of information is because, to be fair to the office holders, they are focusing on trying to get the business sold as a going concern, rather than spraying out loads of information to creditors and others.
Q31 Antony Higginbotham: You do not think that it is a transparency problem. It is a necessity.
David Steinberg: It is a necessity problem, to be honest, yes. They have to prepare reports and proposals and those will get sent out, but of course if you are a supplier that has not been paid, or an employee who does not know whether they are going to be employed next week, those types of statutory reports are too slow for them. They will be relying upon daily interactions, such as they are, with the office holders and their staff about what the office holders are trying to achieve. In my experience they are normally pretty good about that, but obviously it depends on the size of the business. It is difficult in practice to go around and consult with employees in lots of—in the case of Wilko, for example, 400—different locations.
I do not think that the office holder is trying to hide anything. They are usually trying to achieve a sale as a going concern. That means that they have to move very quickly. There is a certain amount of confidentiality around that as well of course.
Q32 Ian Lavery: I was really interested to hear what Professor Shah was saying. The only people that have really been affected by what has happened at Wilko are the workforce. Everybody else has gone away with a considerable amount of money in their pockets. Do you see this as a systemic failure in corporate governance, or do you think that it is a failure of unbridled raw capitalism?
Professor Shah: The two are probably connected. The unique feature of Wilko is that it is an owner-managed business. Generally speaking, owner‑managed businesses have skin in the game. In this case, there is a long history, so there should, in theory, be that respect for the workers, as Nadine has very nicely pointed out, because the workers are family. I do a lot of research on family businesses where the workers have been treated like that and are respected because they are seen as a key part of the engine of the business.
Here, we have an interesting feature. There is that history where that business has passed through generations and that sense of loyalty and duty has not continued somehow. To give you an example, when I was doing the analysis of Wilko, we found that, up to 2017, the family are shown as the majority owners of the group. After 2017, they create another group company called Amalgamated Holdings Wilkinson, which is now the majority owner. Therefore, legally it allows the family to hide behind another layer of ownership structure and minimise their liability.
Here, the reaction of the owners—obviously they have seen the trouble coming and the risks of that—has been to protect themselves at the expense of the employees. Again, you have advisers all over the place helping these companies do these kinds of things. Consultants do not necessarily have to be independent but auditors have a duty to be independent. As professionals, they have a duty to protect the public interest.
Nadine Houghton: This point about the family-run business is a really important point. I would be hard-pressed to find a group of members that so consistently spoke about the fact that Wilko felt like a family and felt like a second family to them. There was absolutely that loyalty and that two-way interaction. Under the previous family ownership, before Lisa became the majority owner, our members describe a period of good pay and conditions, feeling respected and feeling like, as you said, they had some skin in the game. They had a bit of freedom in terms of how they ran their stores. They were trusted. What happens in that interaction is that both sides get to thrive.
There is 115 years of collective length of service sitting behind me right now with just seven Wilko colleagues. We have spoken about the impact of all of this. The reality is that 12,000 hardworking people lost their jobs as a result of all of this catalogue of failures that I am sure we are going to hear more about. That multigenerational family that was part of Wilko is something that I have not heard in any other employer that I deal with.
Chair: We will come back to how they are feeling before Christmas. Let me bring in Sir Stephen Timms on this question around pensions.
Q33 Sir Stephen Timms: Mr Steinberg, can you explain to us, in a situation like the Wilko situation, how it is decided how the assets that are left should be distributed among the various creditors? In particular, what priority is there for making up a shortfall in the pension fund?
David Steinberg: The order in which you make payments out is governed by statute. If you are a secured creditor, if you have a fixed-charge security, such as a mortgage over a property, for example, you have first dibs on the assets over which you have security. After that, you are looking at the administrator’s fees and expenses.
The unsecured creditors—and that would include a deficit on the pension scheme—are, if you like, near the bottom of the pile. They are not at the bottom of the pile; the shareholders are at the bottom of the pile. There are certain creditors that rank ahead of the unsecured creditors. There are the secured creditors and certain preferential creditors, so employees for about £800 of back pay and holiday pay. HMRC, for example, is preferred in respect of certain taxes but not all of them: VAT principally, national insurance contributions if they have not been paid and various other bits and bobs, but not corporation tax if there is any owing, but there usually is not because there are no profits.
You are then into the unsecured creditors. Where there is a deficit on the pension scheme, they rank as unsecured alongside the other unsecured creditors.
Q34 Sir Stephen Timms: Do you think that there is a case for promoting the pension scheme deficit in that priority list?
David Steinberg: That is a matter of policy. In some of the corporate failures, that has been a very big number. Part of the problem is that, when a company becomes insolvent, the way in which you calculate the deficit on the pension scheme changes and produces a hyper-conservative number, which is therefore a very big number. It is a policy decision as to whether or not you should.
Q35 Sir Stephen Timms: Can I check with Nadine? You have written to the Pensions Regulator, I think, asking it to use its anti-avoidance powers to increase the resources in the pension scheme. Have you had a response from the Pension Regulator on that?
Nadine Houghton: No, not as far as I am aware, but clearly we are hoping, as a result of its investigation, that it finds that Lisa Wilkinson has to reimburse the pension scheme. We actually make the deficit £56 million, with £20 million secured against one of the DCs, which I do not believe has been sold yet.
Q36 Nigel Mills: Mr Steinberg or Professor Shah, when I was last guesting on this Committee we were looking at Carillion. The problem there was that the auditors did not seem to spot that there was a problem, whereas here they spotted that there was a problem and disclosed that the company may not be able to get past January 2024. What would have happened if they had said, “No, you cannot use the going concern basis of accounting. You have to use”—I think it is called break-up accounting or break-up valuation. Would that have meant that it would have had to have shown all 400-odd leases as onerous? Would you not have just tipped the company straight into administration at that point?
Professor Shah: As I said to you, four years before, the auditors were sneakily warning that there is significant underlying risk in the future survival of the company, but I do not know how many people were reading the audit report in detail. That is quite unusual. In the going concern paragraph, they were warning. If people did not notice that, it is kind of their problem.
If they had written that, yes, that would mean basically, “The accounts do not give a true and fair view and, as a result, we do not think that this is a going concern and therefore the valuations in the balance sheet need to change”. As to how much the duty of the auditors is to provide the new valuations, that is unclear at the moment in the rules and regulations. At least they have a duty to qualify the accounts and they should call it a qualified opinion and say that they do not give a true and fair view.
As to whether this will trigger a bankruptcy or an insolvency, that is not necessarily the problem of the auditors. That is the problem of society. In a sense, they are there as independent assessors and judges and ought to act with that independence, integrity and professionalism and give a timely warning. That is my opinion.
Q37 Antony Higginbotham: Mr Steinberg, in September the Government proposed reforms of the insolvency sector. A key tenet of that was bringing full regulation to the sector. We have also heard today that a similarly regulated sector, the audit sector, failed pretty spectacularly here. I want your view on the adequacy of the proposals that Government made in September.
David Steinberg: The Government’s proposals cover a number of different areas. On the regulatory side, as matters currently stand the insolvency profession in the UK is, if you like, self-regulated. There are a number of professional bodies that regulate insolvency practitioners. There is a kind of monitoring supervisory role for the Insolvency Service that sits above that, but it is fairly limited.
One of the law reforms that have been proposed was that the self-regulatory bodies of the profession would be replaced by a single unitary regulator, which would be the Government, which would be the Insolvency Service. That was in the consultation. As I understand it, in the proposals that are coming out the legislature will reserve to itself the ability to impose that. For the time being, the idea is that the Insolvency Service will work closely with the self-regulatory bodies, the professional bodies—you could call it a last-chance saloon—with a view to trying to get them to up their game and improve their processes. If they can, the idea is that they could carry on performing it. If they cannot, a single unitary Government regulator will be imposed.
As to whether that is a good idea, in part it is about resources. You can pass the law saying that there is a Government regulator, but in order for that to be effective and make a difference, there would need to be resources behind that. You need to have good people working there. They would need to be on the case of these various office holders.
One related reform, which I think will help, is, at the moment, when insolvency office holders take appointments, they are personal to them as individuals. Even if they are a partner in a big four firm or one of the second-tier firms, it is they, as individuals, who are appointed, not the firms, so it is they, as individuals, who are regulated. There has been a view for some time that that is not really sufficient, because the reality is that it is the firm of which they are a partner that provides all the ballast and all the resource, which is what happens in these cases.
One of the other key reforms that is being proposed is that the firms themselves should be regulated as far as their provision of Insolvency Services is concerned. That is a good idea. I do not know whether that makes a difference, but it is a sensible idea.
Q38 Antony Higginbotham: Would you describe it as evolution of the current approach or revolution, and do you think that that is right? Should we be more ambitious? Do we need to be more ambitious given the corporate failings we have seen before?
David Steinberg: As far as insolvency practitioners are concerned, it is evolution rather than revolution, but that is right. A lot of the criticism that Professor Shah has been directing has been at the auditing profession. There are issues about independence and doing both. My experience is that the insolvency profession actually tends to do a pretty good job. You get bad apples and poor instances, and they get pulled up.
Professor Shah: The average hourly rate is £950 for PwC doing the insolvency of Wilko. I just checked the latest report. It is £950 an hour. A professor of accounting earns about £300 a day if they are lucky.
Q39 Chair: Mr Steinberg, I want to crystallise this, please. Your view is that that evolution of the profession and of the regulation is required.
David Steinberg: Evolution is required. Particularly the decision to regulate firms is a good idea, but it needs to be evolution, not revolution.
Q40 Chair: Patrick, was there a strategy under which Wilko could have survived and continued to be in business today?
Patrick O’Brien: Do you mean if it had taken very different decisions nine or 10 years ago?
Chair: Yes, or indeed more recently.
Patrick O’Brien: Yes, definitely. It would have had to have started quite a while ago. It would have had to have looked at its store portfolio and started moving that. It is very difficult. We have seen a lot of retailers fail over the last 10 years and a lot of the inertia is down to the fact that they have plugged into long leases, which then are very expensive for them to get out of, so they stay put and hope for the best. That is what we have seen across retail over the last 10 years.
Q41 Chair: This was not inevitable.
Patrick O’Brien: No, not at all. It is in the value discount sector. That is an area where, all through the last 10 years of austerity, they have a real opportunity. People are trading down from the mid-market into cheaper retailers, as they continue to do at the moment. There was definitely an opportunity for them.
Q42 Chair: Nadine, what kind of Christmas are Wilko’s former workers looking forward to now?
Nadine Houghton: Ordinarily, our members in Wilko would have been looking forward to working the Christmas period with their colleagues, the colleagues that they describe as a second family. I know that some of our members have gone on to get jobs in B&M and Poundland. They have maintained similar employment. As I say, it really is that sense of a loss of family that so many of them describe as being the real crux of the issue here.
Lisa Wilkinson has not even bothered to offer an acknowledgement, let alone an apology or a visit to one of the stores or distribution centres to say, “Guys, I am sorry that it came to this”. I cannot understand why, if you have had this family business that you have been part of for so long, you would not have the common decency to even come and give an acknowledgement to your workforce in the face of what has been one of the most difficult challenges that many of them have had to face in their lifetime.
Chair: Thank you very much to all of our witnesses. You have set the stage very well for our subsequent panels. I am very grateful to you for your time and for the briefing work that you have done with the Committee. That concludes this session.