FCA makes inquiries into WH Smith accounting error that wiped almost £600m off value

The City watchdog has contacted WH Smith to find out more about its accounting error that wiped almost £600m off the company’s stock market value overnight and led to the departure of its chief executive.

The Financial Conduct Authority (FCA) said it had started making inquiries to assess whether the company had breached UK disclosure rules for listed companies, but was yet to launch a formal investigation.

“We are aware of the reports and we are engaging with the firm,” a spokesperson said.

The newspaper, books and stationery chain cut financial forecasts in August and launched an independent review led by Deloitte after it discovered an accounting blunder at its North American arm.

The revelation came just a few months after the chain sold its high street business, which has since been rebranded as TGJones by its new owners. WH Smith had identified North America as a growth opportunity in its new focus on its branches in airports and railway stations.

The Deloitte review found profits at the division had been overstated by as much as £50m, and after its publication on 19 November, Carl Cowling stepped down as WH Smith chief executive. He has been replaced on an interim basis by the company’s UK chief executive, Andrew Harrison, until a new leader is found.

The FCA’s engagement with listed companies is mainly through inquiries, rather than full investigations, and it believes its non-enforcement direction powers can achieve results without fines.

WH Smith discovered the accounting error while preparing its year-end results, and said in August it was “largely” because it had logged some of its income too early.

The mistake related to arrangements it has with suppliers, which offer rebates if the retailer hits sales targets on certain items and payments for marketing and promotions. It is understood that income should have been logged in the accounts for the next financial year rather than for the 12 months to 31 August.

WH Smith warned earlier this month that it expected profits for its US arm for the year to 31 August to be between £5m and £15m, down from the £55m originally forecast by analysts, and below the £25m announced on 21 August when the accounting blunder was first revealed.

As a result, the group’s full-year profits are now expected to come in between £100m and £110m, about 55% lower than the previous year.

Cowling is staying on at the company until the end of February to ensure an orderly transition. WH Smith wants the new leader to “implement the remediation plan” and take it through the next phase of its shift to focus on its shops at global travel hubs.

WH Smith’s shares rose by 1.5% on Tuesday, but are still down 45% so far this year.