As the FT notes this morning:
Allegations of police bribery at the News of the World have raised fresh questions about the role of auditors and their responsibility for preventing corporate wrongdoing.
But as preparations are made for a judge-led inquiry into the disgraced tabloid, the firm that vetted its accounts seems unlikely to face investigation by audit regulators, at least not in the coming weeks.
As the they note, Ernst & Young has audited News Group Newspapers for more than a decade and never qualified its accounts. But they then note:
But the details that have so far emerged raise questions about whether Ernst & Young fully discharged its duties, according to Richard Murphy, a former auditor who runs the Tax Research UK consultancy.
“What Ernst & Young did or did not do is an issue of concern,” said Mr Murphy, who campaigns against corporate tax dodging.
Media coverage of questionable practices at the News of the World over several years ought to have caused Ernst & Young to suspect its internal controls, he said: “The auditors must surely have done the most basic of Google searches on their client.”
Ernst & Young is saying nothing, citing client confidentiality. Which is fair enough, but I note the FT found little problem finding people to defend them.
However, members of the financial establishment say it would be unfair to expect auditors to challenge small payments amid the flow of hundreds of millions of pounds in and out of the business — assuming any bribes were of the order of thousands of pounds, as reports suggest.
Mike Power, an accounting professor at the London School of Economics, said: “I don't think they [the auditors] are on the hook.”
That's an odd idea given the regulatory framework for auditing I noted here, which gave rise to this story. But as the FT notes, the profession is very reluctant to investigate anything until it has to, about which might as the FT says:
In the meantime, the News of the World saga could feed into a broader debate about whether audits have become irrelevant and need to be rethought.
It is a debate Ernst & Young knows well, given the adverse comment that its auditing of Lehman Brothers has already attracted.
I personally think this one will run, and run.
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I think you’re being harsh on the auditors here. We can’t expect auditors, whose primary responsibility is accuracy of financial statements, to act as catch-all regulators of all activities of a company. If we do, we are making it impossible for them to operate.
p13 of the IAS notes that from an audit point of view we are talking about the laws and regulations ‘generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements’.
Even the IAS recognises that the auditors are not catch-all regulators of the company. p14 goes on to say that the procedures to be carried out are inquiries of management and inspection of correspondence if any with relevant licensing or regulatory authorities.
Who is responsible for the corporate wrongdoing? Those who carried it out. Who is responsible for investigating breach of UK law? The police.
Not E&Y!
Hang on a moment. Your logic is not logical
The job of the auditor is to make sure that things are true and fair. If there was evidence suggesting that there were liabilities that should be provided for, or at least be included as contingent then of course this is within the gambit of the audit
The evidence is that the sums in question were material. After all millions were paid in sign offs for illegal actions with regard to compensation to people whose phones were being hacked. You can’t claim this missed the auditors notice. If it did, they were negligent
Is 1 million material within the scope of an audit the size of NI?
There appears to be a difference between true and fair representation.
A payment to an informant is a genuine payment – how the informant came to be in possession of such information seems to be irrelevent insofar as the auditor is corcened.
If I am wrong, I’d appreciate a reference to the auditing guidelines that may sink a hook into EY
No £1m may not be material
But it related to an illegal act – and that’s material;
And suggested massively bigger liability = serious audit issue