‘Why are auditors suddenly dumping retail clients?’

Ultimately, audit work can be high risk, with pressure to provide an unqualified report that confirms companies’ accounts show a true and fair view of the business. Independence also needs to be maintained and regulatory guidelines followed. Covid-19 has created additional difficulties, particularly for those auditing clients in the retail industry.

The audit process involves evaluating the use of the ‘going concern’ concept when preparing an entity’s accounts. ‘Going concern’ confirms a business has sufficient resources to cover its liabilities for the next 12 months – that is 12 months from sign-off, as opposed to year-end.

Auditors must scrutinise clients’ cashflow forecasts and assumptions to conclude on this. However, for retailers such as Poundstretcher, at the mercy of lockdowns and with no online sales, this is becoming increasingly difficult.

Add to this the pandemic’s impact on supply chains, price uncertainties surrounding Brexit and a need to meet fixed property costs, and ‘going concern’ becomes a minefield.

“With the pandemic’s impact on supply chains, price uncertainties surrounding Brexit and a need to meet fixed property costs, ‘going concern’ becomes a minefield”

BDO’s Companies House filing stated its Poundstretcher resignation followed “an assessment of commercial risk and reward associated with the audit”. 

This risk is very real, as third parties rely on audited accounts when making trading, investment and lending decisions.

However, these third parties do not pay the audit fee – and those that do often see the process as inconvenient, resource-sapping and of no added value because the business has since moved on.

This problem intensifies as important ‘management letter’ follow-ups, which stimulate discussion about future improvements, draw less focus when working to a budget. 

Risky business

As auditor resource and professional indemnity costs also rise, it is therefore not surprising that better paid, less risky consultancy work starts to become more appealing to accountants.

Audit firms are subject to inspection by their recognised supervisory body, such as the ICAEW, which regularly reviews a sample of their files.

The Financial Reporting Council also independently regulates the industry. Its Revised Ethical Standard 2019 recently redefined and restricted the non-audit services auditors can now offer. 

With increasing levels of fines, if a choice needs to be made accountants are likely to choose their most profitable services.

Reputational risk is also significant for auditors, who like any other business would prefer not to be associated with an investigation or scandal. PwC recently resigned as auditor of Boohoo, which came under scrutiny for the exploitation of workers in its supply chain. 

While the independent review by Alison Levitt QC found Boohoo had not profited from the abuses, it noted internal processes were “well below the standard which would be expected of a company of its size and status”. It went on to recommend improvements to corporate governance, compliance and monitoring processes.

“Governance is an expanding and time-consuming part of any audit process, yet has a low fee recovery rate, making an audit with governance complexities unattractive”

Similarly, the Financial Times reported Deloitte had resigned as auditor of forecourts giant EG Group, owned by the successful bidders for Asda, following concerns that governance and internal controls had not kept pace with growth. 

Governance is an expanding and time-consuming part of any audit process, yet has a low fee recovery rate, making an audit with governance complexities unattractive.

Overall, the remit and risk of audit is increasing. ‘Going concern’ sign off is particularly difficult for many retail clients in the current environment, governance issues are intensifying and the need for auditors to maintain a good reputation remains key. 

If risk exceeds reward, an auditor may have little option but to exit. Having said that, risk perception will differ between auditors depending on their own outlook and existing client base. 

In terms of mitigating risk, this is a difficult ask in a pandemic when much is outside a retailer’s control. 

However, strong governance, robust internal controls, an expanding sales mix to include online channels and forecasts with realistic assumptions, will help the business and its auditor alike.