Auditors must keeping bearing bad news

The role of the auditor is not an easy one. Strict guidelines outlined by the
Financial Reporting Council
and the Auditing Practices
, combined with the implied pressure an auditor can face from a board
see them pulled in all directions.

But there has still been debate over whether auditors should go easy on
audits in the current economic climate or go ahead as per usual. FRC advice
earlier in the crisis was supposed to head off a deluge of ‘going concern’
reports by clarifying the conditions that would prompt one.

Recent audit reports on ITN and Tiscali are examples of where the auditor
still felt compelled to deliver bad news. Ernst & Young’s report on Tiscali
warned of ‘fundamental uncertainties’ about the business. The company disagreed.

In ITN’s case, Deloitte issued a ‘going concern’ report raising ‘material
uncertainty’ about the company’s future. The accounts were otherwise

The two opinions show that despite pressure from many sides auditors are
still willing to deliver unpalatable news.

Experts would argue that in both examples the auditors did the right thing.
The argument is that it is dangerous for auditors to hold off in the current
economic conditions because they reflect the reality of the market. Waiting
until the economy improves doesn’t necessarily mean that a particular business
will immediately receive an upturn in fortunes.

If auditors were to hold off on reporting on companies in financial
difficulty that would clearly be irresponsible to those who have a financial

Auditors are, of course, nervous about their position. Last week a delegation
of the Big Four went to the Department for Business to talk about extra legal
protection for auditors because of fears over unfair and potentially life
threatening legal suits as a result of the crisis.

Of course, preparing reports that are not favourable to a company’s outcome,
such as Tiscali, doesn’t come without risk. The share price suffers, investers

Tiscali is also looking for a new auditor. A situation not uncommon when
auditor and client fundamentally disagree.

Would Ernst & Young have been better off ducking the issue and going with
the cient’s view?

Most observers would think not – and besides, that was never the advice from
the FRC. That was aimed at clarification and more specifically at whether
companies had to confirm lines of credit to be considered a going concern. In a
bid to avert a stampede to the banks, and an avalanche of qualifications the FRC
said it wasn’t a necessary prerequisite. Liquidity in the current climate will,
however, remain sensitive.

On the face of it Tiscali’s issue seemed to be close to the FRC worries. But
the company’s problems were really about renegotiating debts – some way from
confirming lines of credit.

Deloitte’s considerations at ITN were far from these issues. This was all
about falling profits and a £22.8m shortfall in the pension fund.

Recent research showed an expected flurry of ‘emphasis of matter’ statements
– one step from going concern doubts – have not materialised.

ITN and Tiscali demonstrate however, that the auditors can still take a firm

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