As part of their joint work to represent individual shareholders’ interests, the ShareSoc and UKSA policy teams continue to press government to improve information transparency for investors. With that aim in mind, UKSA’s Policy Director Peter Parry has written to our relevant contact at BEIS, as follows, concerning the issue of auditor resignations:
Action following resignation of auditors
The Policy teams at UKSA and ShareSoc have been having further thoughts about the action that should be taken by companies when auditors resign the audit instruction or have their contract terminated by the client. I remember that Sir Donald Brydon expressed interest in this issue when we met in June. The recent resignation of Grant Thornton as auditor to Sports Direct has prompted wider interest in the topic.
In our submission to Sir Donald we originally proposed that in any situation in which the auditor resigned or was dismissed by the client the company should be obliged to call an EGM. Following further thought and discussion we felt that it would be more appropriate for an RNS to be made. This should be sent to all members and all those holding an interest in the company’s shares via a nominee. It is very important, however, that the RNS provides appropriately detailed information for investors.
One of our members, Malcolm Howard, recently had direct experience of the problems caused when the auditors of Tex Holdings resigned without giving a full and proper explanation of the reasons. In this particular case an RNS was issued but it was at best unintentionally incorrect and at worst deliberately misleading. Malcolm has summarised the case as follows:
‘I had been a shareholder of Tex Holdings for several years; they always made a modest profit and paid very good dividends. I paid 100p per shares and over the years the price of the share has been around this figure and up 140p. I have recommended this share to my friends as an income share.
On 15 April 2019 the share price fell to 84p. The company had issued an announcement that the company had made a MODEST loss due to a change in accounting standards and as a result there would be no dividend and the company was in breach of certain banking covenants. Within ten seconds of reading this, I was onto my broker and my entire holdings were sold at 84p per share. Please note that writing to you is not a personal complaint as the dividends I had received exceeded my capital loss. The shares quickly fell to 68p.
Fourteen days later, on 29 April, the company announced that it now agreed with its auditor that the shortfall in revenue was not due to changes in accounting standards. Furthermore, as it could not produce accounts within four months of its year end the shares are being suspended.
Looking through Companies House records I read that on 31 October 2018 the company’s auditor BDO LLP had resigned. In their resignation letter they wrote, “We confirm none of the reasons for us ceasing to hold office and no matters connected with our ceasing to hold office need to be brought to the attention of members or creditors of the company.” Had I known of such a resignation I would have sold the shares there and then (at 110p per share). At the time Companies House were informed, there was an RNS announcement, but the heading said ‘change of advisor’ NOT as it should have said ‘change of auditor’.
To comply with company law, the company had to lodge its 2018 accounts with Companies House, which it did. The company’s new auditor, Scrutton Bland LLP, issued to most damning qualified report that I have ever read. They wrote:
(1) They cannot confirm that the company has kept proper accounting records.
(2) They cannot confirm the value of inventories, which they suspect are overstated.
(3) There are serious issues that makes it doubtful that the company could be described as a going concern.
The company’s bankers are obviously concerned because as stated in the Annual Report they have withdrawn the company’s overdraft facilities and Tex Holdings are now reliant upon a loan from their major shareholder. The ‘modest’ loss turned out to be £590,000 which is significant for the size of the company. The shares remain suspended.’
Malcolm has taken this case up with FRC, adding:
Our concern is the behaviour of auditors, which definitely should be a concern of the FRC. As an accountant, I can tell you that if a company has kept proper accounting records for years, it is unlikely it will suddenly fail to do so. The question has to be asked: what was the real reason BDO LLP resigned as the company’s auditor? What did they really know?
It seems clear that there is a need to tighten the disclosure rules surrounding auditor resignations and dismissals. Calling an EGM may be too draconian and could still result in the beneficial shareholders being left in the dark. An RNS statement would probably suffice but this must provide investors with information that is both accurate and adequate.
On a related topic, the FT published a very good editorial piece on auditor selection, particularly following situations in which the previous incumbent has resigned. The piece, ‘Ensure companies get the audit they deserve’ (Monday, 5th August) can be accessed via the following link: https://on.ft.com/2KjPZfu .