When we said we wanted more competition in the audit market, this wasn’t exactly what we had in mind.
In recent months a series of companies, all facing scrutiny of different sorts, have found themselves looking for new auditors.
PwC stepped down at fashion retailer Boohoo, which had faced questions over suppliers’ workers. Deloitte resigned as auditor of EG Group, the petrol station business built by the Issa brothers. Essar Energy and Essar Oil UK lost big name auditors, amid concerns around the group’s governance and finances.
EG found itself another Big Four name in KPMG. But the others had to look elsewhere: Boohoo and Essar Oil UK ended up with mid-market firm PKF Littlejohn. Essar Energy is now with a “micro-entity”, an outfit with only three chartered accountants. (Frasers, owner of Sports Direct, arguably kicked off this trend in 2019 when it traded Grant Thornton for RSM, amid unease about governance).
The fact that audit’s big beasts are finally taking a tougher line on the jobs they’re prepared to do is welcome. But this shuffle just underlines the urgent need for market reform.
Shaking up a cosy, concentrated market isn’t easy. At present about 95 per cent of FTSE 350 audits are undertaken by just four firms; we want more unfamiliar names on audit reports.
But it feels perverse that concerns around audit quality are resulting in companies with acknowledged issues heading to less experienced firms, likely to be less well resourced. Regulators this week fined Haysmacintyre for failings in its audit of Associated British Engineering, highlighting concerns about challenger firms taking on complex jobs.
The government must stand firm on reforms proposed in March. Broadening the definition of public-interest entities to include large private companies, like Essar, is a must: that designation brings tighter rules for the auditor as well as the client. Another proposal — a form of joint audit — could help mid-market firms build capacity and experience with a range of work, not just the Big Four’s cast-offs.
There are also simpler changes needed. In the first instance, auditors themselves and audit committees are charged with checking that a firm has the wherewithal to do the job properly. But a change of auditor is an event worth investigating.
The anointed regulators — the FRC in the case of listed companies, or a professional body like the ICAEW in the rest of the market — should be vetting new appointees, especially on the rules around independence where audit firms are unusually twitchy.
It would help, then, if they knew about them. While there is a requirement that the regulator be told when an auditor leaves, there is no corresponding duty to tell them of a new appointment. The result is that regulators, like reporters, are left hunting through Companies House for clues as to who has the new job.
Another change, discussed for donkey’s years, would be to insist on transparency when an auditor leaves. Most changes of auditor are unremarkable; some involve a bust-up over fees; some reflect more fundamental issues. Why not require the departing firm to give reasons for their departure and make sure that this is clear, detailed and quickly available to investors and creditors, through RNS where possible?
This is already the spirit of the rules. But in reality, too much is left to the discretion of the departing auditor about what they consider relevant and should be disclosed. A dance whereby statements are sent to the company, which then is responsible for sharing it more widely, means in reality the information too often gets buried, or lost in a delayed filing. Resignation letters in some of the cases above, which did contain important information, took several months to surface.
Auditors work on behalf of investors and lenders. Just as the extended audit report opened up that work to interested parties, the government’s reforms should be prescriptive about the information required around resignation, and the manner in which it is disseminated.
There are going to be more frequent changes of auditor, whether motivated by rotation or reputation. Best everyone is clear about what’s going on.