EY audit conflicts weigh on Royal Dutch Shell-BG Group deal

CONFLICTS of interest and issues around auditor independence could affect the proposed acquisition of BG Group by Royal Dutch Shell, Manifest has suggested.

Analysis by proxy voting agency Manifest ahead of Royal Dutch Shell’s AGM next month has found that EY, which replaced PwC as Shell’s auditor for the 2016 financial year, has served as auditor for BG since 2013. Meanwhile EY’s lead partner Allister Wilson was the lead partner for BG immediately prior to the takeover.

Shell’s proposed takeover of BG was backed by shareholders in January.

Major UK institutional investor, Standard Life, has expressed concerns over the auditor independence issue the appointment of EY poses.

Governance & stewardship director at Standard Life Mike Everett said: “BG Group’s accounts for 2015 – and early 2016 – still have to be audited by EY and we perceive that their independence, objectivity and scepticism could be compromised. For example, if a material error in BG’s 2014 and 2015 accounts comes to light would shareholders be able to rely on EY to take an objective view on figures they audited?”

Following EY’s appointment as auditor, Standard Life opposed Shell’s acquisition of BG. In a review of governance and stewardship in 2015, Standard Life wrote: “We asked what had been done to ensure safeguards were in place to address any conflicts of interest. We also engaged with BG and EY to obtain their input into the management of conflicts, and we discussed our concerns with the Financial Reporting Council.

“While obtaining, through our engagement, additional comfort around the future approach and focus of Shell’s audit committee, we continue to have concerns about the appointment of EY as auditors of Shell. We shall continue to focus our engagement on audit quality at Shell.”

The news comes as the FRC confirmed last week it is to introduce measures to further curb potential conflicts of interest facing auditors in its latest update to the UK Corporate Governance Code.

The final draft includes changes to strengthen auditor independence by applying prohibitions to a range of engagements that could result in an auditor facing a conflict of interest.

The announcement forms part of the EU’s audit reforms, which are intended to open the FTSE 350 market up to more audit firms such as Grant Thornton and BDO, among others.

Central to those reforms are mandatory tendering and rotation of auditors every ten years.

A spokeswoman for Shell said: “EY will be appointed as Shell’s auditor for the financial year 2016, and shareholders will be asked to approve this appointment at the 2016 AGM. This followed an extensive competitive tender, in line with industry best practice. We have full confidence in EY’s suitability for the role.”