Auditors caught in Rover headlights

MG Rover’s legacy could be new legislation that shines a light on the network
of interwoven relationships between auditors, companies and their directors.

The measures, under consideration by the Department of Business, Innovation
and Skills, follow a long-running post mortem into collapsed British car maker
MG Rover.

Under the new measures, directors will have to reveal their connections with
the external auditor through other companies in which they have a material
interest.

A BIS spokeswoman said the department would investigate the issue. “The
department will accept the recommendation to review the regulations on
disclosure of auditor remuneration,” she said.

The issue was first raised last week by corporate watchdog the Financial
Reporting Council (FRC), which is investigating Roverís external auditor
Deloitte.

In its financial statements MG Rover said it paid Deloitte £21.3m in
non-audit work. However, in a report, commissioned by BIS, the same non-audit
price tag was found to be £28.8m.

The FRC said the £28.8m figure likely included fees paid to Deloitte by
companies or partnerships in which directors had a significant interest. The
Companies Act does not require this information to be disclosed.

New legislation would have the potential to pull back the curtain on the web
of relationships between an auditor, its client and directors within that
company.

Outgoing FRC chief executive Paul Boyle, speaking before his departure last
Friday, said it was an area that needed attention. “The whole debate surrounding
non-audit services is about the work they do for the management and directors
adversely affecting their ability to make independent judgments,” he said.

“The Rover report has revealed a very interesting issue when the audit firm
is doing work for other companies that the directors have a material interest
in… This is another dimension of the relationship between auditors and
directors which perhaps hasn’t had enough focus.”

Audit firms already face possible curbs on their non-audit work by another
review recommended by the Treasury Select Committee in the wake of the crisis,
which is being conducted by the Accounting Standards Board. Allister Wilson,
audit partner at Ernst & Young, said there were a series of reviews into the
subject.

“The whole issue of providing better transparency and disclosure around
non-audit fees is something we fully support,” he said. In its May 2009 report
into the banking crisis the Treasury Select Committee said further restrictions
would lead to greater trust between investors and auditors.

Further reading:

FRC chief Boyle bows out with
no regrets

As Boyle steps down audit is
at a crossroads