The head of the ICAEW has warned that the UK could see an increasing number of auditors walking away from clients in order to protect their reputations and audit business.
Michael Izza, ICAEW’s Chief Executive, said that the industry is facing ‘a watershed moment’ as auditors come under heavy scrutiny and criticism over the quality of their audit work following a number of high-profile company collapses.
Mr Izza said: “Audit firms understand that trust and professional scepticism are at the heart of their work, and they know that they stake their reputation on their ability to deliver high-quality audits of companies.
“It may become a more regular scenario for auditors to rule themselves out of jobs which they feel they may not be able to perform to a high enough quality.”
Grant Thornton recently quit as the auditor of Sports Direct, leaving the retail giant in a potentially unprecedented position of being the first major listed business unable to appoint one, with other firms reluctant to take the company on as a client.
With the practice of the large audit firms, particularly that of the Big Four, coming under intense scrutiny from both government and regulatory bodies, Izza believes that auditors “may highlight concerns around the controls and governance of companies” by removing themselves from jobs they are anxious could damage their reputation.
Deloitte, KPMG, EY and PwC, as well at Grant Thornton and BDO have reportedly all begun company-wide reviews of their clients this summer to determine which could be problematic to their reputations as they face increased scrutiny.
Grant Thornton’s decision to quit as Sports Direct’s auditor, and the Big Four’s reluctance to fill the gap also puts the government in a precarious position of potentially having to force a firm to take on the job, if none step forward voluntarily. This power is within the rights of Andrea Leadsome, the current Secretary of State for Business, Energy and Industrial Strategy.
While this power is yet to be exercised, should more audit firms begin to walk away from jobs out of fear for reputational damage, we could well see the minister make use of this capability in the near future.
However, there are concerns among figures in the industry over the possibility firms could be forced by ministers to audit Sports Direct, or any company.
In August, one executive said: “How will we convince one of our audit partners to be the signed partner on the accounts? Will they be given special dispensation from enforcement action from the regulator?”
In an apparent attempt to allay these fears, a spokesperson at the department for business said: “The secretary of state’s powers to intervene only apply in particular circumstances, which do not currently apply here.”