As both regulators and private litigants sharpen their focus on corporate governance, the universe of criminal and civil risks for auditors is set to expand.
On 28 November 2016, the Financial Reporting Council announced its decision to open an investigation into the auditing of Mike Ashley’s Sports Direct International plc. Whilst the probe is into whether the auditing services provided by Grant Thornton UK plc were compliant with accepted practices, and not, as has been reported, Mike Ashley or Sports Direct itself, it nonetheless marks the end of a turbulent year for the controversial sports retailer.
At the same time, it may bookend a year which has featured closer scrutiny of corporate auditing processes and their auditors, as both regulators and private litigants have taken steps to enhance standards of corporate governance, both in the UK and globally.
The FRC’s stated mandate is to promote high-quality corporate governance and reporting to foster investment, and to encourage engagement between investors and boards through the Stewardship Code. To achieve this aim, the FRC sets standards for corporate reporting, audit and actuarial practice and seeks to monitor and enforce accounting and auditing standards. The FRC’s enforcement remit includes holding overall responsibility for the regulation of the actuarial and accounting professions in cases which raise or appear to raise important issues affecting the public interest in the UK.
2016 has seen a number of significant case successes for the FRC. In August, global professional services firm PricewaterhouseCoopers LLP was fined £2.3m for failures in a 2007 audit of Cattles plc. More recently still, in November Deloitte LLP was fined £4m – the highest ever penalty imposed on an audit firm – for a number of deficiencies in audits of Aero Inventory plc between 2006 and 2008. Aero entered administration in 2009.
Ongoing high-profile investigations include a probe into the conduct of a Tesco plc board member, and auditors PwC, following the revelation of alleged accounting irregularities at the supermarket in 2014, and into PwC, again, for its audit of BHS Limited after the British retailer was wound up earlier this year.
A deeper focus on auditors and their conduct has not been solely the province of UK regulators. In September 2016, the American office of EY LLP paid a $9.3m fine to the US Securities and Exchange Commission after it emerged that an EY partner working on the audit of a NYSE-listed company was in a clandestine relationship with the firm’s chief accounting officer.
In the same action, EY was also censured for a senior partner enjoying an improperly close – platonic – friendship with a client’s CFO. Whilst EY didn’t admit or deny the findings, the SEC argued that the audit giant had known about both relationships but in each case had failed to act.
At the same time, private litigants have also contributed to the debate about the responsibilities (and liabilities) of audit firms, particularly in the context of alleged failures in anti-money laundering systems and controls. In August, PwC settled a $5.5bn claim arising out of the firm’s failure to detect a fraud that led to the collapse of US bank Taylor, Bean and Whitaker. PwC continues to contest a claim brought by the Bill & Melinda Gates Foundation, which has alleged that it ‘wilfully ignored’ corruption at Petrobras, the beleaguered Brazilian state-run oil company. Other multinational audit practices face similar litigation claims.
Just as, in recent years, regulatory attention has been brought to bear on those professional firms that enable money laundering, as much as the money launderers themselves, the importance of competence and propriety in the audit process has increasingly been recognised as a complementary tool for promoting high standards in corporate governance independent of bringing criminal, civil or regulatory action against the company itself, or its board.
The UK government has made clear its emphasis on the need for strong corporate governance structures across British industry. This inevitably will mean even greater focus on corporate audit, and those undertaking audits, arguably creating a much expanded universe of regulatory, civil and perhaps even criminal risk for auditors, and audit firms.
Hannah Laming is a partner and Nicholas Querée an associate in the business crime team at Peters & Peters Solicitors LLP