Following the collapse of Carillion in January this year with over £900 million of debts, a £590 million pension fund deficit and uncalculated £millions in uncompleted contracts several investigations were announced into what went wrong.
Among these is a probe, by the independent accountancy regulator, the Financial Reporting Council (FRC), into the company’s audits for the years 2014, 2015 and 2016 by auditors KPMG, to identify any breaches of regulatory requirements “in particular the ethical and technical standards” required of auditors. This week the FRC also announced inquiries into two of the company’s former financial directors.
This is not surprising given that Carillion was one of the UK Government’s largest contractors for outsourced services and building projects, but it is often the case that where businesses collapse one of the spotlights invariably falls on the auditors.
Why focus on auditors when things go wrong?
The Institute of Chartered Accountants in England and Wales (ICAEW) is one of the bodies appointed to approve and register auditors, as required by law, and defines the purpose of the audit as follows:
“to provide an independent opinion to the shareholders on the truth and fairness of the {company’s] financial statements, whether they have been properly prepared in accordance with the Companies Act and to report by exception to the shareholders on the other requirements of company law”.
Audit reports are filed with Companies House and used by suppliers and other interested parties to make decisions about their trading relationship with the company concerned, not least how much credit to extend.
Auditors therefore are the public scrutineers and should be held to account if they are found to be complicit in any deceit through concealing problems that ought to be highlighted.
Who is required to have a statutory audit?
While there are some exemptions covered below, in principle, any public body or business above a defined turnover and size, as well as any business of whatever size that comes under FCA regulation, such as those involved in banking and insurance, must have audited accounts.
In addition, a business, whatever its size, must have an audit if shareholders who own at least 10% of its shares request one at least one month before the end of the financial year for which the audit is being requested.
Who is exempt from a statutory audit?
Subject to the above, businesses and organisations qualify for exemption if they can satisfy at least two of the following three conditions: an annual turnover of no more than £10.2 million, assets worth no more than £5.1 million and/or 50 or fewer employees on average.
Who can carry out an audit?
Accountancy companies containing suitably qualified individuals and which are registered with a recognised supervisory body, such as the ICAEW, are empowered to carry out audits.
To qualify they must be and be seen to be independent, to comply with auditing standards and ensure that all their employees are “fit and proper persons” competent and qualified to carry out the work.
Equally important is the code of ethics to which auditors must conform, which includes behaving with integrity, and being objective, only accepting work the member or firm is qualified to do and maintaining standards of professional knowledge. The auditor must also maintain confidentiality and must not use information about a company it is auditing for their own professional gain.
Another requirement for auditors is for them to demonstrate that they do not have any conflict of interests with the company they are auditing. This can be an issue for large complex companies but essentially the auditor ought not to have any relationship or be doing any work that might be used to influence the outcome of an audit.
Plainly, it is important for there to be some proper scrutiny of a business’ accounting and handling of its finances, for the sake of creditors and those people who have a stake in its survival and this is why the role of auditor in the event of a collapse is inevitably going to be a focus of investigation.