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Date: 2024-05-24 Page is: DBtxt003.php txt00016571

Accountancy / Audit
Important Role

Shareholders take company auditors to task ... The two used to be indifferent but not now — expect more AGM challenges


Peter Burgess
Shareholders take company auditors to task ... The two used to be indifferent but not now — expect more AGM challenges

The collapse of big-name companies has led to a blame game — and shareholders have called auditors to account

A spate of corrosive accounting scandals has raised tension between two of corporate Britain’s most influential stakeholders: those who provide companies with capital and those who sign off their books.

Shareholders and auditors have traditionally been indifferent to each other, with the former typically rubber-stamping the reappointment of the latter at companies in which they invest.

However, the collapse of businesses such as Carillion, Patisserie Valerie and BHS has led to a blame game — and shareholders have called auditors to account.

“Previously votes against auditors were based on whether they were seen as being independent of the company. We are now at a stage where demonstrable failure by some firms is becoming a reason to oppose their appointment. Bad audit firms should fail,” says Tim Bush, head of governance and financial analysis at Pirc, the shareholder advisory group.

Shareholders’ historical lack of engagement with the audit process was highlighted in a government report this month on the future of auditing. The House of Commons business select committee grabbed the headlines when it called for the Big Four accountancy firms to be split up.

It also wrote: “In evidence to this inquiry and to our previous inquiry into the collapse of Carillion, investors expressed dissatisfaction with the quality and usefulness of audits. Yet, routine engagement with audit matters remains, by and large, very low.”

Meanwhile, an independent review of the quality and effectiveness of auditing, commissioned by the UK government and carried out by Donald Brydon, the outgoing chairman of the London Stock Exchange, published its initial call for views this week.

It also looked at the interaction between shareholders and auditors. “The review has at this stage found little evidence suggesting there is any significant interaction with auditors outside the annual meeting, where again, interaction is very cursory,” Sir Donald wrote.

A day later, the Financial Reporting Council, Britain’s accounting regulator, launched an investigation into Grant Thornton’s audit of Interserve, following the government contractor’s collapse last month.

Jessica Ground: Schroders takes a strong line when it comes to audit quality

While recent corporate failures have brought the issue to a head, market watchers and regulators have long been concerned that shareholders have failed to hold auditors to account. In 2013, the UK’s Competition Commission, a regulator superseded by the Competition and Markets Authority, warned that “shareholders almost always follow the recommendations of the board”, and that they are “poorly placed to judge the performance of their auditors”.

The new tougher stance can already be seen in voting results at company AGMs, where shareholders have the final say on the auditor’s appointment. In May last year, investors in SIG, the FTSE 250 building materials group, took the rare move of sacking Deloitte, the group’s external auditor, after a whistleblower revealed accounting irregularities. Investors holding 78 per cent of stock voted against the reappointment of the Big Four firm.

Deloitte was later investigated by the FRC over its audit of two annual statements by SIG, which SIG admitted had overstated profits.

A governance expert at the time of SIG’s AGM said the scale of opposition to Deloitte was “unprecedented” as auditor reappointment votes typically achieve more than 95 per cent support.

Several other listed companies have also found it harder to win shareholder backing for their choice of audit firm.

According to the Investment Association’s public register, which records all significant votes against management at AGMs, 16 votes on auditors failed to achieve 75 per cent support in 2017 and 2018. These include at FTSE 100 stalwart BT Group two years ago, as well as Lonmin and International Biotechnology Trust, which each came close to losing auditor reappointment votes.

So far among this year’s AGMs no audit vote has attracted less than 75 per cent backing — but shareholders are planning to challenge several auditor reappointments at companies with accounting problems. Chief among their targets is Metro Bank, the troubled FTSE 250 lender that disclosed a costly accounting error in January. It has yet to announce a date for its AGM but is expected to do so in the next two weeks.

Shareholders have also taken aim at certain partners at accountancy firms — the individuals who sign off audit work — as well as chairs of audit committees at companies with accounting problems.

Several of the UK’s largest asset managers recently told FTfm they planned to vote against tarnished individuals on the other corporate boards on which they sit. This has already resulted in audit chairs at Carillion and Patisserie Valerie leaving board positions at other companies.

Jessica Ground, head of stewardship at Schroders, says the £421bn fund group takes a strong line when it comes to audit quality. “While most of the focus has been on auditors it is important to realise that this is only one component of strong corporate reporting,” she says. “Much of the responsibility is with the finance team, internal audit and the audit committee. If we have concerns about reporting we take a holistic approach in examining where the shortfall lies.”

Ashley Hamilton Claxton says RLAM has been inundated with requests to meet the large firms

The Commons business select committee proposed some solutions to what it saw as shareholders’ lack of engagement with the audit process. It recommended audits be made more transparent, that auditors make presentations at AGMs, that the revised Stewardship Code require investors to consider audit matters, and for audit reports to be published alongside financial results, rather than a few weeks later with the annual report, which is more typical.

To address concerns about a weak relationship between shareholders and auditors, accountancy firms have set up investor engagement groups.

Ashley Hamilton Claxton, head of responsible investment at Royal London Asset Management, the £119bn investment business, says she has been inundated with requests to meet the large firms. “They have all been emailing and asking me to join investor roundtables — but it often seems a bit generic,” she says. “They are making an effort to reach out but we are more interested in discussing company-specific issues, which we can’t really do if the information is not in the public domain.”

Hywel Ball, head of UK audit at EY, one of the Big Four, concedes that discussions between shareholders and auditors tend to be on top level issues rather than about individual companies because of confidentiality requirements.

While he has been encouraged by seeing more shareholders being proactive in contacting his company, he says both sides need to find a way to exchange information and views that does not breach disclosure rules.

“Everyone is very good at articulating the problems with auditing but more work needs to be done on finding solutions,” he says.
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