The retailer WH Smith PLC includes the following accounting policy in its financial statements:

• The Group receives income from its suppliers in the form of supplier incentives and discounts (collectively “Supplier arrangements”). These incomes are recognized as a deduction from cost of sales on an accruals basis as they are earned for each supplier contract. The level of complexity and judgement is low in relation to establishing the accounting entries and estimates, and the timing of recognition. Supplier incomes that have been invoiced but not received at the year end are recognized in Trade receivables, or in Trade payables where the Group has the right of offset. Incomes that have been earned but not yet invoiced are accrued and are recorded in Accrued income.

Against that backdrop, here’s a recent news release from the company:

• In preparation for the Group’s year end results for the financial year ending 31 August 2025, a current financial review has identified an overstatement of around £30m of expected Headline trading profit in North America. This overstatement is largely due to the accelerated recognition of supplier income in the North America division.
• WH Smith now expects Headline trading profit from the North America division for the financial year ending 31 August 2025 to be approximately £25m, down from previous market expectations of approximately £55m.
• As a result, the Group expects full year Headline profit before tax and non-underlying items1 to be in the region of £110m.
• The Board has instructed Deloitte to undertake an independent and comprehensive review.
• The Group will provide a further update at its preliminary results announcement.

As reported by BBC News:

• AJ Bell investment analyst Dan Coatsworth said the error was “nothing short of a disaster”.
• He said North America is crucial to WH Smith’s growth ambitions, and “the loose thread of an accounting error in this part of the group” will cause concern about further problems.
• He added that the cut in profit forecasts “will cause huge embarrassment to management”.
• “Investors will be sobbing into their cornflakes on the news.”

Accounting Web tried to flesh out the story a bit:

• Matthew Lewns, former financial outsourcing manager at Mazars and now accountancy partner lead at iplicit, told AccountingWEB that the situation underlines how revenue recognition is a “complicated area”, especially where rebates and marketing contributions are involved.  
• “Many organisations still manage it through very large spreadsheets and manual journals, and that’s where formula errors, overwrites or copy-downs can creep in,” Lewns said. “A small mistake in that process can have big consequences when it flows through to reported profit.”
• He raised that it’s not just an issue for retailers, highlighting, for example, that businesses ranging from those selling software subscriptions to those taking advance payments for tickets or working on long-term construction projects could fall foul of the same challenges of releasing revenue into the profit and loss at the right time. 
• …“This has hallmarks of the Tesco scandal back in 2014 where the supermarket chain also incorrectly recorded supplier income (accelerated income), which led to inflated profits,” financial reporting guru Steven Collings recalled to AccountingWEB. 
• In 2014, Tesco’s revenue recognition troubles caused the supermarket to overstate profits by £263m and could have caused one of the UK’s biggest retailers to go under. Finance directors will now be wincing again at the WH Smith blunder, which really reinforces the pressure on finance teams to get rev rec right. 
• “When an error like this surfaces, the strain on finance teams is huge. The business faces brand damage and loss of confidence in the numbers, which can make it harder to attract investors, secure funding or complete a sale. For not-for-profits, it can undermine donor trust,” commented iplicit’s Lewns. 
• He added, “On top of that, finance leaders are putting their own careers on the line when they sign off accounts. A mistake of this scale doesn’t just impact the balance sheet – it can cost people their jobs.”
• Lewns advises that a practical response could be to reduce reliance on spreadsheets and adopt systems that automate revenue recognition. 

It seems that the references to spreadsheets and manual journals and the like are based on conjecture rather than inside knowledge; we’ll have to wait and see. Much of that Accounting Web report reads as if the advances of recent decades in technologically-aided internal control and corporate culture and audit sophistication had never happened, as if the notion of “adopt(ing) systems that automate” a key accounting process were still relatively novel. Which of course isn’t to say it won’t be proved relevant. One wonders what hindsight will make of the accounting policy statement that: “The level of complexity and judgement is low in relation to establishing the accounting entries and estimates, and the timing of recognition.” On its face, that might either be an insight into a fatal degree of complacency in this area (for example, in not having tuned into various sources of complication) or a sign that what we’re looking at here is indeed a bone-headed error, in allowing a prominent and material error to result from an area of “low” complexity and judgment…

The opinions expressed are solely those of the author.