FT.com / Companies / Financial Services - Shareholders ponder Cattles legal action.
Some of us have been warning one or more of the Big 4 auditors will fail. It seems likely regulators now agree.
So it's timely to note that PWC are in more trouble:
Cattles plc has admitted to a breakdown in internal controls, which resulted in its impairment policies being incorrectly applied. Its shares were suspended in April this year following the discovery of the accounting errors.
Last month Cattles said in a statement that the balance sheet at the end of December 2008 would have been likely to show a deficiency of shareholders’ funds of £197m ($320m) with loans and advances to customers of £2.5bn and gross external borrowings of £2.7bn. Its numbers are unaudited.
Shareholders have been called to an extraordinary meeting today so that Cattles can explain the “serious loss of capital” caused by the higher than expected impairment provisions.
PwC, the company’s auditors, resigned earlier this month .
On Tuesday David Greene, head of litigation at Edwin Coe, said the law firm had hired barristers and forensic accountants and was examining whether legal action could be taken against former directors or against PwC as former auditors.
The Accountancy and Actuarial Discipline Board, the independent investigative and disciplinary body for accountants and actuaries in the UK, said in July that it had launched an investigation into the conduct of members at Cattles and of PwC as auditors to Cattles.
PwC would not comment.
Well of course it wouldn't.
But prima facie the accounts were wrong. And it was not a one off. And the question has to arise about how long cut price audit can last when this sort of problem recurs time and again.
Audit risk is meant to be born by auditors. It is being externalised to shareholders and society at large. Is that sustainable?
I doubt it.
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As you and many others say, cut price audits do not bring any value to anyone.
So what’s the solution? Increase audit fees? That will make the auditors even more vulnerable to pressure from their clients who foot the bill.
In a functioning market, if the auditors are seen as less than competent, there should be a cost to this e.g. a company goes to the bank and asks for a loan. Bank asks to see audited accounts. Then says, these were audited by (to pluck an example out of the air) PWC. We don’t have confidence in their audit procedures so we’ll either refuse to give you the loan or charge a premium rate.
The shareholders then say “why are we paying these cowboys?”
This doesn’t seem to happen. I can suggest partly why
1) Virtual monopoly of audit services by 4 supliers
2) The banks don’t criticise the big 4
3) Lack of transparency in the proces above. Even if the banks do charge higher because of the auditor, the shareholders won’t get to hear of it, at least not through official channels.
How can all this be changed?
[…] commentator on this blog made the following excellent point: In a functioning market, if the auditors are seen […]
[…] commentator on this blog made the following excellent point: In a functioning market, if the auditors are seen […]
If shareholders cannot place any reliance upon audited accounts; by PWC or otherwise; what is the point of them?
Either the accounts or PWC?
@barry dearing
Excellent question
Richard
Just what is so excellent about barry’s question? It is precisely because shareholders can rely on audited accounts that the auditors can be sued when things go wrong. Whilst it would be nice if every audit were sufficiently thorough to prevent these kind of failures, the existence of some audit failures does not mean that all (or even many) audits are failures. By all means let’s hold the big 4 to account, and debate ways to improve the current set-up, but let’s not undermine the fundamental need for indepedently audited accounts.
@JD
Yes
But PWC can’t deliver them
That’s the point
They’re not independent of their clients when they provide them with other services and there’s little evidence they’re auditing either
Richard