Sports Direct is battling to prevent “private” documents it provided to its accountants being handed over to regulators, in a court case that is being closely watched by the audit profession.
The retailer, which is majority owned by billionaire Mike Ashley, argued in a Court of Appeal hearing on Wednesday that it had a “fundamental right” to keep private legal documents it gave to Grant Thornton and Deloitte in the course of their work for the company.
It is attempting to overturn a High Court ruling from 2018 that ordered it to hand over 40 company documents to the Financial Reporting Council, the audit regulator.
The FRC took Sports Direct to court to gain access to the material in relation to its investigation of Grant Thornton’s audit of the business in 2016.
It is probing whether Grant Thornton signed off on a business arrangement between the retailer and Barlin Delivery, a company owned by Mr Ashley’s older brother John, and why the transaction was not disclosed in the accounts.
The judge sided with the regulator in 2018 and criticised Sports Direct for “obfuscation and delay verging on obstruction” by refusing to hand over the documents.
However, Sports Direct argued on Wednesday that the papers were covered by legal protection that keeps certain communications between a client and a lawyer confidential. A lawyer for the company told the court that “legal professional privilege is a fundamental human right” and the High Court judge had “fallen into error” in his order in 2018.
The documents include emails and faxes Sports Direct exchanged with its lawyers but which were subsequently sent to Grant Thornton, then its auditor, and Deloitte, which was advising the company.
The FRC argued in its response to the appeal that Sports Direct should not be permitted to “cloak a non-privileged document in privilege simply by communicating it through a lawyer” and “operate unjustifiably to withhold relevant material from other parties and the court”.
Senior auditors and lawyers have expressed concern about the 2018 court decision. Lawyers at DAC Beachcroft said it could have a “chilling effect” on the willingness of listed companies to hand over privileged material to their own auditors.
Accountants routinely review legal correspondence in the course of company audits. This correspondence could include advice to the company on a lawsuit or on an ongoing merger that could affect its balance sheet.
A company may be reluctant for that material to be passed to the FRC because of its information sharing agreements with other regulators such as the Financial Conduct Authority and the Serious Fraud Office, and the risk of it being published as part of a future enforcement process against the company’s auditor.
BDO, the UK’s fifth-largest accounting firm, has written to the ICAEW accountancy trade body, about the “significant public interest issues” of the Sports Direct ruling. It said it was concerned the judgment could restrict auditors’ access to privileged advice and prevent them from completing full company audits.
BDO head of advisory Gervase MacGregor accused the FRC of “discouraging full access” while simultaneously punishing auditors for not obtaining sufficient audit evidence.
The FRC levied almost three times more sanctions against UK accountants last year than in the previous year, up from £15.5m to £43m.