Audit resignations thrust into spotlight

When KPMG resigned from the audit of XL Leisure in 2006, no one, it seems,
paid much attention ­ – until the company went bust, that is.

But auditor resignations like KPMG’s are set to become more high-profile
following changes to the Companies Act, according to industry experts.

Under the old rules when an audit firm resigned and issued a section 394
statement it could explain its reasons for resigning ­ for example, citing
concerns over the governance of their audit client.

The auditor’s client had the option of trying to block a statement through
the courts before it was filed with Companies House, however.

The most high profile example of this dispute was between
PricewaterhouseCoopers and Jarvis, the road and rail infrastructure group.

In 2000 PwC won undisclosed costs on an indemnity basis in a High Court
victory following a long-running dispute over audit fees and a statement lodged
by PwC when it resigned as auditor.

Directors at Jarvis alleged that PwC’s section 394 statement had suggested
there was ‘an unsatisfactory state of affairs’ in the way the company accounted
for long-term contracts, and that the firm wanted to paint its resignation in ‘a
more favourable light’.

The court issued a judgment asserting that the firm had acted with ‘total
propriety’ and was highly critical of Jarvis.

Changes to the Companies Act offer more support. Under new rules auditors
have to report their resignation statements to the Professional Oversight Board,
part of the Financial Reporting Council, as well as Companies House.

Martin Jones, national audit technical partner at Deloitte, said: ‘Situations
like this [KPMG’s resignation of the XL Leisure audit] are likely to get more
early attention from regulators given the change in the law.’

The accounting irregularities at XL ­ which collapsed last week leaving tens
of thousands of passengers stranded abroad ­ were caused by some of its staff
delaying payment of invoices to Alpha Airports, an airline catering company.

The delay flattered XL’s figures ahead of a flotation of its then parent
company, Avion, on the Icelandic stock exchange.

After an initial investigation into the accounting irregularities, KPMG still
had concerns over the accounts but felt it was ignored. BDO Stoy Hayward, which
replaced KPMG, says it subsequently dealt with the issue. In future, that kind
of work might attract more attention.

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