External Auditing of Companies: Deficiencies

Lord Davies of Brixton Excerpts

Monday 14th October 2024 Lords Chamber

[Lord Davies of Brixton (Lab)]

My Lords, this debate is about the manifest deficiencies in external auditing. That has been clear from the catastrophic collapses of major companies, including those mentioned in the Question: BHS, Carillion, Patisserie Valerie, and London Capital and Finance. I have heard the remarks from the noble Baroness, Lady Ford, and the noble Lord, Lord Livingston of Parkhead, who tell us things have improved. The problem with these cases, which are not all that historic, is that they indicate an attitude within the auditing profession. It is the tell that is there. We have to respect that, and no doubt will debate it at length when we consider the Bill. It is still worth going through these specific cases because they have shaken public confidence and they call into question the robustness of the auditing profession.

Let us start with BHS. When it collapsed in 2016, it left 11,000 employees out of work and a £571 million pension deficit. Despite these glaring financial issues, BHS’s auditors, PricewaterhouseCoopers, had signed off its accounts without raising any red flags. The issue here lies in the auditor’s failure to adequately assess BHS’s ability to continue as a going concern, and a failure to highlight potential risks to investors and employees.

When Carillion, a construction and facilities management company, collapsed there was £7 billion in liabilities and just £29 million in cash. This collapse shook the whole UK construction industry and led to widespread job losses. KPMG had signed off on Carillion’s accounts for 19 years without challenging its aggressive accounting practices. Carillion overstated its revenue and delayed recognising losses, which created an illusion of financial stability. What we have here is that the audit failed properly to address the company’s rising debts and overreliance on short-term contracts. This failure highlighted a systemic issue: the auditors’ unwillingness or inability to challenge management effectively.

Patisserie Valerie’s collapse in 2019 was perhaps even more shocking, due to the outright fraud that had occurred and with Grant Thornton, as my noble friend mentioned, even failing to adequately check the company’s bank accounts. This indicates the auditors’ seeming lack of curiosity and investigative rigour, and that behaviour went unnoticed for years.

Finally, London Capital & Finance adds another dimension to these auditing failures although, in this case, the collapse stemmed from regulatory shortcomings as well. It sold risky and often misrepresented financial products to ordinary investors, many of whom lost their life savings when the firm went into administration.

These auditing companies are still there and still doing the work. We need more assurances from the auditing profession that things have improved. We want to see systemic changes that will avoid these problems arising in future. The auditors failed adequately to assess the financial viability of the companies they were auditing; the provision of more information and longer reports does not really address that issue.

Clearly, the role of external auditors is crucial to the functioning of our financial markets. They are needed to provide an independent assessment of a company’s financial statements and offer a degree of protection to investors, employees and the broader public. The solution to this, as my noble friend Lord Sikka identified, is much greater openness about the auditing process. That is really what the auditing profession is failing to provide to us. I hope that we are going to have a very interesting Bill and interesting discussions on it. These issues will need to be addressed and I urge my noble friend the Minister to give us some assurance that they will be taken on board.

In my final few seconds, since I have the Minister’s attention, I will just mention the actuarial profession, which is being swept into the Bill—I declare an interest as a fellow of the Institute and Faculty of Actuaries—in a way that seems to show a lack of understanding on the part of the department of the work that needs to be done in this area. If the actuarial profession is to be regulated, there needs to be much more work on exactly how that is to be done than appears to have been done so far.