Big four auditors in firing line as failures pile up

The choice of former Standard Life Aberdeen chief executive Keith Skeoch as interim chairman of audit and governance watchdog the Financial Reporting Council could not be more timely.

A series of missteps by big audit firms, with Ernst & Young (EY) caught in the headlights, has refocused attention on the potential for audit failure.

In the last week, Deloitte has removed itself on governance grounds as the auditor to the global forecourt retailers EG Group, which has recently come to prominence following the private equity-backed agreement by the controlling Issa brothers to buy the Asda supermarket chain for £6.8billion.

Former Standard Life Aberdeen chief executive Keith Skeoch (pictured) has been made interim chairman of audit and governance watchdog the Financial Reporting Council

This has been followed by the formal disclosure that PwC has decided not to re-tender for the audit of fast fashion group Boohoo.

A recent independent report on Boohoo’s supply chain by Alison Levitt QC was scathing on the governance shortcomings of a company dominated by founder and executive chairman Mahmud Kamani, where there is a notable lack of independent scrutiny on the board.

Even a cursory reading of the group’s annual report reveals unusual inter-company transactions and profit adjustments involving Kamani and his family.

EY currently finds itself in the firing line for a series of audits that have gone badly wrong.

The Wall Street Journal, the bible of American finance, noted on its front page that EY was responsible for the audits of four different companies which had landed shareholders with £23billion of estimated losses.

Biggest among these was the implosion at German fintech group Wirecard, where larger scale fraud has been uncovered largely due to the perseverance of investigative reporting by the FT.

EY also was the auditor at China’s Luckin Coffee, the UK quoted Middle Eastern medical provider NMC Health and its sister enterprise financial services group Finbablr plc.

EY says it conducts 150,000 audits a year and played a key role in uncovering fraud at two of the firms involved.

Concerns: Hut Group’s fitness fanatic executive chairman Matthew Moulding also serves as the company’s landlord and ceo

Nevertheless, the series of audit scrapes has rekindled memories of the problems which beset Arthur Andersen, which withdrew from audit work on big public companies in 2002 after it audited the now notorious US energy trading group Enron.

Andersen was also auditor and failed to blow the whistle at collapsed Northern Ireland-based sports-car maker DeLorean.

The withdrawal of big four audit firms from working with petrol station kings EG and Leicester-based Boohoo shows that they might be learning from the past and no longer want to work with firms where feeble governance is under scrutiny.

Given all the problems elsewhere, EY might want to consider the wisdom of working with the recently floated online fitness and beauty retailers, the Hut Group.

In spite of an enormously successful initial public offering, there are lingering questions about the lack of checks and balances for executive chairman Matthew Moulding.

The fitness fanatic is also the company’s landlord and in spite of a pledge made at the time of flotation, there is still no appointment of an independent director without past connections to the firm.

Asda buyers the Issa brothers ( left) and Boohoo’s co-founders Mahmud Kamani and Carol Kane (right)

The frequency of audit foul-ups in the last several years, ranging from the collapse of construction group Carillion in January 2018 to the black hole discovered in the finances of eaterie Patisserie Valerie in early 2019, has pointed to the shortcomings of the accounting profession.

It has shed light on the need for stronger surveillance of accounting firms and swifter punishment when audits and governance go wrong.

A report by the Competition & Markets Authority (CMA), released in April last year, called for separation of the audit and consulting arms at the big four accounting firms because of potential conflicts of interest.

In many cases, the consulting fees received by audit firms outweigh those of the audit.

As a result, the big four auditing companies are less demanding in their audit questions than they might otherwise be, to preserve their consulting fees.

A separate report by former mandarin and Legal & General chairman John Kingman was hugely scathing about the Financial Report Council and proposed replacing it with a new statutory regulator the Audit, Reporting and Governance Authority.

Simon Dingemans was drafted in from Glaxosmithkline as a powerful chairman to direct reforms but jumped ship after just eight months amid frustration about the lack of promised legislation.

A third report by the robust former London Stock Exchange chairman Donald Brydon, released in December last year, made no fewer than 54 recommendations for reforms, including changes which formally recognised the duties of directors towards all stakeholders, not just investors.

Brydon’s recommendations, which now form part of a broader review of audit, warned of how weak governance – such as that at Boohoo, EG and the Hut – could potentially lead to bad accounting outcomes.

It is shameful that successive governments, having put so much energy into radical audit and supervisory reform have failed to formally implement any of it.

The consequences in terms of public confidence in the integrity of quoted and large privately controlled enterprises is proving catastrophic.

Property funds to reopen
Investors who have been trapped in Aberdeen Standard’s property funds since March will regain access to their money next month.

The investment giant is planning to reopen its £1.6bn Standard Life Investments UK Real Estate Fund and £900m Aberdeen UK Property Fund from November 16.

Both were closed in March along with other UK property funds, after the pandemic wreaked havoc across the retail, hospitality and office letting industries.

This meant valuation experts were no longer sure how much properties were worth, so savers couldn’t be sure how much their investment was worth.

But at the end of September, valuation firms began to lift their ‘material uncertainty’ guidance and a number of funds began to reopen.

Managers including Royal London, Legal & General, Columbia Threadneedle and St James’s Place unfroze their property funds and let investors to pull out their cash.

Aberdeen Standard had held back, worrying that a rush of investors might try to withdraw their money and the funds wouldn’t be able to sell the properties fast enough to generate the cash.

George Shaw, the funds’ manager, said the decision was made to ‘ensure the fair treatment of all clients and customers’.