Auditors Coming Under Increased Scrutiny From London Courts

(Bloomberg) -- A string of high profile finance scandals have pushed the work of the world’s biggest auditors back into the spotlight as U.K. lawsuits stack up despite government attempts to clean up the industry.

The Big Four auditors -- PricewaterhouseCoopers LLP, KPMG LLP, Deloitte LLP and Ernst & Young LLP -- are among bookkeepers facing clients in court or under regulatory scrutiny as the sector’s watchdog said that 30% of audits it inspected weren’t of good enough quality in the year to the end of March. KPMG in particular came under fire for its work on banking audits.

“There should be more, given the regularity with which the regulator tells us that the auditors are delivering, what I call, bad products,” Prem Sikka, an accounting professor at Sheffield University, said. “All kind of protections are built into auditors which makes it hard to sue them.”

Recent cases against auditors include KPMG, which faces a multi-million pound fine for its work on the sale of a bed manufacturer to H.I.G. Capital LLC. While PwC is being sued by administrators of a racing car dealership JD Classics Ltd. It’s accused of negligently failing to spot fraud in the company’s accounts, resulting in 41 million pounds worth of losses. Deloitte was fined 15 million pounds last year for its audit of Autonomy Corporation Plc, the largest-ever sanction levied by the FRC.

”We believe the claim is without merit and will be vigorously defending it,” a PwC spokesperson said commenting on the suit.

Ernst & Young, already under fire over its audit of Wirecard AG in Germany, is looking at a potential lawsuit over its auditing work for London-listed NMC Health, a health-care provider that entered administration after the discovery of $4 billion in debt. At the same time the accounting giant has been sued in the U.S. accused of masking a six-year fraud from NMC Health investors.

A spokesperson for EY said they intend to defend the claim that is “without merit.”

Meanwhile the FRC has opened investigations into the audits of Greensill Capital and Sanjeev Gupta’s Wyelands Bank following the collapse of the trade finance specialist.

The lengthening list of cases comes despite government and industry pledges to improve audit quality following a series of past scandals, such as the 2016 collapse of the shop chain BHS, whose auditor PwC was subsequently fined 10 million pounds by the FRC. The penalty was subsequently reduced to 6.5 million pounds.

The government promised to act after the 2018 failure of Carillion Plc without warning from its auditor KPMG, which remains under FRC investigation. All of the Big Four firms have accepted the need to change auditing since then and restructured their audit practices. In March this year the government finally published audit reform proposals including forcing the big firms to separate their audit and consulting arms and replacing the FRC with a new, more powerful, watchdog.

Nevertheless, more lawsuits are being brought against the auditing profession because of current auditing standards, according to Richard Murphy, director of Tax Research LLP. They are only obliged to look at the accounts they’re given in a certain period -- not to exercise judgment on the bigger picture of a company’s wellbeing.

“People believe auditors do a job that in law that they’re not required to do,” Murphy said. “From 2006, auditors’ job has been to confirm that the International Financial Reporting Standard has been correctly used, it’s nothing to say the resulting accounts are true and fair.”

Reforms may be on their way. While the FRC has previously said that the biggest problem auditors faced was the “failure to exercise professional skepticism,” and too much work being given to junior staff.

“We support the broad direction of these reforms and are pleased to see a recognition of the importance of audit alongside the need to strengthen the wider corporate reporting system,” Michelle Hinchliffe, U.K. chair of audit at KPMG, said.

Deloitte declined to comment.

Mike Suffield, a director at the Association of Chartered Certified Accountants, a body that represents the industry, said that too much attention is on auditors, while managers and directors are not being held to account.

“Failures of companies where the auditors are being sued are becoming more prevalent, I don’t think that concludes that the audit itself is necessarily broken,” he said.

©2021 Bloomberg L.P.