FGL Case Brief: When Scepticism Fails on Going Concern and Credit Losses

Case in brief

In 2021, Mazars LLP (now Forvis Mazars LLP) served as the statutory auditor for Studio Retail Group (SRG), a London-listed digital catalogue retailer. The audit engagement partner signed off on the financial statements for the year ending 26 March 2021, issuing an unmodified opinion. The auditor concluded that the directors’ use of the going-concern basis was appropriate and reported that no material uncertainty relating to going concern had been identified.

In February 2022, just eight months after the audit report was signed, Studio Retail Group entered administration. The insolvency wiped out shareholder equity and exposed creditors to substantial losses before the business was acquired in a pre-packaged administration sale.

Following a regulatory investigation, the UK Financial Reporting Council (FRC) issued a Final Settlement Decision Notice in July 2026. The FRC fined the firm £577,125 (discounted for exceptional cooperation) and the engagement partner £33,412. The regulator found serious breaches of the International Standards on Auditing in three areas of audit work: expected credit losses (ECL), going concern, and financial services income. The FRC explicitly clarified that the audit breaches did not cause the retailer's insolvency, but rather represented a severe failure by the auditor to obtain sufficient appropriate audit evidence.

The audit and control issue

While the FRC found failings across multiple areas, the core professional breakdown was a severe lack of professional scepticism regarding management's most subjective estimates. Studio Retail's business model relied heavily on offering credit to its customers, making the highly material ECL provision a critical area of audit risk. However, the FRC found that the auditors failed to obtain objective, corroborative evidence to validate management's ECL calculations, relying too heavily on management assertions instead of independently verifying the underlying data.

Furthermore, the FRC ruled that the firm’s audit work on the appropriateness of management's use of the going-concern basis was flawed. In a volatile retail environment, assessing going concern requires auditors to rigorously test financial models against severe but plausible downside scenarios. Instead of applying this necessary independent challenge, the FRC found specific failings in the audit work on the sensitivities in management's going-concern model and cash-flow forecasts, demonstrating a distinct lack of professional scepticism.

FGL practical lesson

FGL practical lesson: An external audit fails its professional purpose when it accepts management's financial models without rigorous challenge. A going concern assessment and a material credit loss provision require active stress-testing and independent corroborative evidence, not the passive acceptance of management's forecasts.

What professionals should do

1. Maintain strict role boundaries: Management owns the accounting estimates and financial models. The Audit Committee provides vital oversight, and the external auditor independently audits them. One role cannot substitute for another. Studio Retail Group’s own 2021 Audit Committee report records that the Committee actively challenged downside sensitivities and going-concern assumptions. However, this case demonstrates that diligent governance review does not replace the auditor's requirement to gather independent audit evidence.
2. Management must document severe downside scenarios: Finance teams must formally document how their going-concern models respond to severe but plausible downside sensitivities. Providing a clear, evidence-based trail of stress-testing allows auditors and the board to review the resilience of the cash-flow forecasts objectively.
3. Auditors must apply robust scepticism to cash flows: External audit teams must actively stress-test management's cash-flow sensitivities against objective external data. Passively reviewing a cash-flow forecast does not satisfy the requirement for professional scepticism under auditing standards.
4. Secure independent corroborative evidence: Auditors must secure independent evidence for highly subjective accounting estimates, rather than relying solely on management representations, historical methodologies, or internally generated, unverified data inputs.
5. Do not adopt management's assumptions blindly: While management is responsible for preparing the financial statements, the auditor must maintain complete independence in evaluating them. An auditor cannot fulfil their statutory duty by adopting management's assumptions as their own without sufficient appropriate audit evidence obtained through appropriately designed audit procedures.

Primary sources

• Sanctions against Forvis Mazars LLP and Mr David Allen (Financial Reporting Council Final Settlement Decision Notice, July 2026)
• Studio Retail Group 2021 Annual Report and Accounts