Two reports have added piquancy to the series of Audit Briefings that I am beginning to feature on this blog, the second of which will be out in the next couple of days.
As Sky reported over the weekend:
The Official Receiver is advancing a legal claim against the auditors of Carillion, the collapsed construction giant, that could target as much as £1bn in damages.
Sky News understands that the liquidators of the former FTSE-100 constituent filed a claim form against KPMG on Friday - a move which gives the claimant four months to submit more details of its case.
Carillion collapsed in 2018 owing approximately £7 billion, having had a clean audit report from KPMG before doing so.
In fairness, we do not know what the basis of this legal claim is going to be as yet, but the likelihood that it will include an allegation that the auditors should have prevented the payment of a dividend of more than £200 million shortly before the company collapsed is high.
The inability of auditors to apparently work out when a company might, or may not, pay a dividend is an issue to which I am paying considerable attention at present. I wrote about it only a couple of weeks ago, asking whether the problem of potentially illegal dividends is widespread within the FTSE. The chance to test this in court would be very welcome. When the evidence is that at least 20% of large companies payout over an extended period more by way of dividend than they earn by way of profit the likelihood that there is something profoundly wrong in the way that legal dividends are estimated would appear to be very high.
The second story is from the Financial Times this morning and notes:
HSBC bosses fear they will struggle to convince some of the UK's largest accounting firms to bid for the bank's $94m-a-year audit after initial outreach to contenders suggested a number of Big Four firms were reluctant to take on the role.
HSBC is the UK's largest lender. It had a track record over many years of also having g the largest, by length, set of UK accounts. The latest version at only 380 pages may not quite win that award, but the scale of the audit can be imagined. The fact that the accounts are also produced in Chinses, where they must also be true and fair, adds to the challenge.
That, though, is not the issue. The issue is that if only PWC, as the existing auditor of the company, are willing to tender for this work then for all practical purposes there has ceased to be an audit market in the UK. The trouble with that fact is that the concept of an audit market underpins the whole approach that the government has to audit regulation. If the element of choice of auditor is removed from companies, as it would seem it might be in this case, then what is left is a charade of there being audit independence because the opinion of an alternative opinion has ceased to exist.
What might that mean for the future of audit? That is a crucial question to ask. The obvious answer is that another audit model is required. It may be that the one we have has indeed run out of road. The sheer scale of companies and their appetite for risk, that audit firms are too willing to fuel through their consultancy arms, may have defeated it.
What is the alternative? There is only one that I can see, and that is audit by a state agency. We do, of course, have one. It is the National Audit Office. It has shown itself more than willing to offer the types of critical opinion so rarely found in the commercial audit market.
The government has no discussion of this option in its latest consultation on the future of audit, which is very much focussed upon tinkering with the status quo, and on reinforcing the audit market. But is that market is dead - and it looks increasingly as if it will be - the time for more radical thinking has arrived.
It's either that or we abandon the concept of audit and let large corporations run amok. I know which option I prefer.
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While running a SME (revenue £10 million) some years ago, I had a run in with the NAO. The company had been given a clean bill of heath by HMRC (following a detailed inspection) but a politician in Westminster with an axe to grind wanted to use the company as a sacrificial lamb for attacking a gov’t minister. That MP – then a powerful figure on the PAC – got the NAO to perfom a second audit. What the NAO did however wouldn’t qualify as an audit in anyone’s book. It failed to look at any serioius evidence, didn’t ask to see the firm’s books, didn’t send in an auditor or a consultant. Instead it produced a report based on national statistics that had very little relevance to the firm’s activities – but that conformed 100% to the MPs political requirements. The MP then publicised her attack using our company as an example of bad practice and ministerial incomptence. On the basis of that experience, I wouldn’t trust the NAO with my family accounts let alone those of major companies.
The NAO does not audit private companies now
Your claim makes no sense as a result
Sorry, but this feels like you have either made this up or really do not understand what happened
I don’t fabricate and I don’t like being called a liar. My account is 100% correct and if it doesn’t accord with your prejudices that’s your problem not mine. For information – since you appear not to have understood – the NAO didn’t conduct an audit. It didn’t even try to. It merely produced the report demanded by the MP. The report became an instrument – doubtless one of many – in a sustained assault on Vince Cable’s ministry when he was Secretary of State for Business, Innovation and Skills. I wrote an article about the case for openDemocracy. You’re welcome to read it: https://www.opendemocracy.net/en/opendemocracyuk/being-margarethodged/
And, in case you’re wondering, I’m a paid-up member of the Labour Party.
You said it did an audit
I said it didn’t – because they do nut audit private companies
You have now said it didn’t do an audit
So my claim that your story did not make sense is true
And that is all I said
Being accurate helps you make a correct claim
On the narrow question of banks we do already have another very important player – the regulator. At a bank like HSBC there will be a team of regulators crawling though all sorts of reports to ensure compliance. Also, some of the changes in regulation since 2008/09 have been about strengthening the hands of internal compliance/risk managers in their positions and making named individuals accountable for failure. In short, even without an external audit, I would be reasonably confident that the accounts are “true and fair” and, if they were not, almost certain that KPMG/PWC would not spot it!
I would also note that when things looked a bit “iffy” the regulator forced banks to suspend dividends.
Now, whatever criticisms we might have about banks, the regulatory regime ahs done reasonably well in the last decade. There have been scandals/debacles – but they have all landed on the plate of equity investors not broader stakeholders (eg. Archegos).
Is this the sort of model under which large, critical non-bank companies should be regulated/audited? Possibly.
Clive
I agree that regulation has improved
But audit is a much bigger issue and their micro view of the activities of the enterprise does not in any way substitute for a macro view of its accounts
And these are macro accounts – which is another thing that does have to be understood now
Richard
Fair enough – I accept that my focus is narrow.
But, the techniques used to rein in and understand banks’ activities might have lessons more broadly. It might be possible to get a better quality of audit and control without having a centralised Government audit function.
But can we have banks unaudited when that is a legal requirement around the world?
Looking at what you have said about Companies in general it seems we need some sort of Companies Regulator, ‘Offcomp’ anyone?
That could clearly do audit.
I like that
A regulator is very badly needed
There is a long established audit trail of British regulators that have failed so abjectly that their sad lives have been hastily terminated; I offer the unlamented Financial Standards Authority (FSA: 2001-2013), merely as a sorry example of the species. I do not share the confidence of Richard or Mr Parry in the willingness or capacity of British regulators to do the job required of the – given the passage of time, and the settlement into the rythmn of British social culture that is inevitable. Sooner or later every British regulator becomes the prisoner of the industry it regulates. This, I conten is indisputable. This has less to do with the structuring of regulation (the regulator newly set up typically starts well, because it is cleaning up the mess of the previous failed incumbent); but far more to do with the instrinsic culture and inherent nature of British society.
I will just let that comment simmer gently on the hob.
The hob is now slightly warmer as a result of your comment
I remember many years ago in HM Customs and Excise I visited a fairly large company and found the Purchase Ledger Controller and Financial Accountant were having an affair and she manufactured false purchase invoices which he then authorised for payment – the auditors had not picked this up ! They were arrested just before leaving for Spain ! Sadly HMRC no longer make on premises inspections so goodness knows how much gets missed nowadays
Those HMC&E visits were a great way of putting the wind up clients
My impression of corporate accounting is that there are lots of fibs being told at scale and auditing seems to cast a rather blind eye.
It would be great I think if the State intervened on behalf of investors and pension funds but as John Warren points out, what’s the point if even the State is captured by vested interests – which it is (remember George Osbourne and HSBC amongst other things).
And this is a global problem – not one just related to the UK.
Maybe next time there is a huge crash, Governments should avoid bail outs – that might sharpen a few minds about the necessity of higher accounting and auditing requirements?
I can live with not bailing out shareholders….but employees? Why should they suffer?