Claims that compensation is owed to investors by Big Four auditor EY as a result of its handling of the Wirecard scandal have reignited concerns about how far investors can trust auditing work completed on investee companies, and has renewed calls for change in market practices.
'Systematic problem' in the auditing market
Stewardship director at Rathbones Matt Crossman pointed to an apparent "noticeable drop in the audit quality of late", citing recent examples such as Wirecard, NMC Health and Carillion as evidence of a "systematic problem" in the auditing market.
He said: "There needs to be more competition in the market, and most of the 'Big Four' firms - PWC, Deloitte, EY and KPMG - have been compelled to make big internal changes to avoid being split up by the regulator."
However, Crossman added that while it is "easy to beat up the Big Four when they fail", something "a bit dull but completely vital" must be addressed to alleviate issues in the market: accounting standards.
He explained: "Investors should be asking if the standards themselves need reform. It is the standards themselves that can lead the auditor to be over-focused on compliance and box-ticking instead of being encouraged to look at the underlying performance of the business and its future prospects."
Crossman also noted investors should pay attention to ancillary services to companies, which "are even more lucrative than the core audit".
"Investors need to keep a watchful eye on how much additional work the auditor is being paid for by the company", he explained.
For its part, the FRC previously set a target of at least 90% of FTSE 350 audits requiring no more than limited improvement by the end of the 2018/2019 inspection cycle. However, not one audit firm inspected in that year achieved that target.
Crossman said: "The FRC has promised to keep the pressure up but investors need to play their part as well. Audit contracts at big FTSE companies are lucrative, and should meet the same rigorous assessment as any other use of shareholder funds."
Sarasin's Landell-Mills said investors need to see Key Audit Matter reports, which have become populated by unhelpful "boilerplate" language in recent years, start to provide "meaningful information around where risks to accounts lie".
She explained that investors would then be able to take that information to audit committees and company boards in efforts to improve standards.
Landell-Mills also agreed with Crossman's assessment that shareholders have a responsibility to hold auditors to account, noting that investors rarely use their opportunity to vote for the deselection of an auditor even in examples when poor practice has been demonstrated.
She said: "The idea of accountability to shareholders has not really been very prevalent, because shareholders have not voted them out.
"If shareholders started doing that, you would get auditors actually coming to investors to find out what they want to see. It would be a much healthier environment and market."