Sports Direct is a company that would test the forbearance of even the most stoical auditor. Grant Thornton appears finally to have lost patience.
On the day of its annual results presentation last month, the retailer delayed an announcement for much of the day as it explained to its audit firm a significant eleventh-hour tax liability. Grant Thornton has now told the Financial Reporting Council, the regulator, that it intends to quit as Sports Direct’s auditor after September’s annual meeting.
In considering the mandate, other auditors have shown all the enthusiasm of nudists invited to study a hornets’ nest. One by one, they have ruled themselves out, citing, variously, conflicts of interest, reputational risk, or governance concerns.
Sports Direct, the idiosyncratic creation of mercurial chief executive Mike Ashley, is a dysfunctional special case. But it is unlikely to be the only UK listed company to find itself snookered in its search for a new auditor. This raises the question of whether the audit market is on the brink of failure, even before the implementation of reforms to the sector.
The aim is to improve the quality of audit, reduce the potential for conflict with more lucrative consulting mandates, and encourage challenger firms such as Grant Thornton to compete with the Big Four of EY, PwC, Deloitte and KPMG. Proposals include a legal split of audit and non-audit work, the appointment of joint auditors to large companies, and the FRC’s replacement by a more muscular watchdog.
Audit fees have risen to meet these new demands, but fines and compliance costs have risen faster. Public, political and media scrutiny of auditors has also escalated. The largest UK accountants have responded by reviewing existing audit relationships. They could stop working for companies if they believe the risk to their reputation or profitability seems too great.
The accountants protest too much. They may even be trying to throw sand in the gears of common sense reforms aimed at ending the current trust crisis.
All companies should receive the audit they deserve, in the interest of investors and the public. In the short term, the business secretary has the power to appoint auditors if a company fails to do so. Using this power is bound to revive discussion of whether the regulator should be more closely involved in auditor appointments.
Non-executive directors have more intimate knowledge of a company’s requirements than any independent body would have. Shareholders seem to prefer the status quo. When consulted, only one challenger firm — Grant Thornton, as it happens — self-interestedly championed such a plan. As a result, in its review of the sector, the Competition and Markets Authority preferred to enhance scrutiny of audit committees.
An independent appointments process — advised by the audit committee — would alleviate two concerns, however. It would remove the suspicion that auditors pitch their services to the managers whose homework they are paid to mark, and it would allow the regulator to ensure audits were properly funded and resourced.
When a UK parliamentary select committee examined the idea of independent appointment of auditors, it concluded such a “radical reform” would amount to “an admission that a broken sector is beyond being fixed by the market”. It is not yet time to concede that market forces cannot repair audit. The shunning of Sports Direct suggests, though, that it will not be long before more sweeping solutions need to be reconsidered.
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