The accounting scandal enveloping WHSmith has escalated following revelations that the retailer heavily depends on promotional income from suppliers to meet sales targets. This development raises concerns that the issues within the company's financial records may be more deeply rooted than initially believed.

WHSmith's shares plummeted by over 40% recently after the company, operating approximately 1,200 stores globally in various locations, disclosed that profits from its North American unit would be significantly lower than anticipated, with a shortfall of around £30 million, reducing the expected figure to approximately £25 million.

This sharp decline marked one of the largest single-day drops among large and medium-sized retailers currently listed on the stock market, as reported by broker AJ Bell. Deloitte, the accounting firm, is currently investigating the situation, attributed by WHSmith to the 'accelerated recognition of supplier income' in its US division.

While it is common for retailers like WHSmith to receive fees from suppliers for product promotions or displays, experts caution that the premature booking of such income could lead to inflated profits. Overreliance on supplier income to achieve profit targets is viewed as a potential warning sign by industry analysts.

An analysis of WHSmith's financial statements indicates a substantial increase in supplier income, more than tripling from £10 million in 2022 to £33 million in 2024. This surge, coupled with the £30 million overstatement in profits from the US unit, suggests that the supplier income figure for the current year could be even higher.

Comparisons have been drawn between WHSmith's accounting scandal and past retail controversies, such as the case of Tesco in 2014, where delayed supplier payments were used to inflate profits. Despite these parallels, WHSmith is not subject to similar regulatory actions.

Amidst its transformation into a travel retailer after divesting its High Street stores, WHSmith's rapid expansion in the US market may have led to increased promotional activities to drive sales. Concerns about cost management have been raised, particularly regarding potential oversupply and subsequent discounting.

The outcome of Deloitte's investigation is eagerly awaited, with WHSmith revising its profit expectations for the year downwards to £110 million, a significant decrease from the previous estimate of £160 million. The company, along with its auditors PwC and Deloitte, has refrained from commenting on the matter.

Reference from News: Accounting scandal mounts at WH Smith