Britain’s biggest auditors are in crisis talks over fears that tough Covid rules will stop them visiting retailers to check stock in the run-up to Christmas. The likes of PwC, KPMG, Deloitte and EY face being unable to inspect shops and warehouses to verify the value of items such as electrical goods and jewellery.
Unless a solution is found, they will have to leave red flags in company reports to warn investors. It could leave shareholders unable to rely on the results posted by listed firms, causing chaos in the stock markets.
Some auditors – thought to include PwC – have been experimenting with using drones to verify stock that is easy to access, such as outdoor machinery and equipment.
Watch out: Coronavirus has kept audit firms out of jewellers
But checking stock kept in boxes or stored in warehouses will be more difficult, auditors say.
The prospect of another national lockdown this weekend is set to make these plans even trickier. It comes amid fierce criticism of the audit giants for failing to pick up on fraud and accounting black holes that have left thousands of shareholders nursing huge losses. Katharine Bagshaw, of accounting body ICAEW, said: ‘It’s going to raise questions in investors’ minds about the reliability of reported profits.
‘The stock figure matters – it has a direct impact on profit. The general underlying risk of fraud and error is obviously going to be enhanced this year in some cases.’
Many companies must complete stock-takes at the end of the year before filing their accounts, which auditors check and sign off.
Yet auditors are concerned about protecting their staff who need to visit shops and sites as Covid infection rates continue to rise.
Scott Knight, head of audit at BDO, said: ‘Protecting the health of our people comes first, but conducting stock counts is an essential part of evidence gathering so we have to be agile. It’s a delicate balancing act for auditors.’ He added: ‘Clearly, a builder’s yard in the middle of nowhere differs significantly from a jewellers on Bond Street in terms of getting there and the ability to socially distance.’
The problem adds to the danger that investors cannot trust auditors after a string of major company failures on their watch. Grant Thornton and Mazars were slammed by the watchdog last week over their audits of local authorities. The Financial Reporting Council said their auditing ‘requires significant improvement’.
Shareholders have been wiped out in big corporate failures, such as Carillion in 2018, which cost taxpayers more than £150million.
Grant Thornton felt the heat over the collapse of Patisserie Valerie last year, for failing to spot alleged accounting fraud. And the downfall of German tech giant Wirecard this year put the spotlight on its auditor EY for failing to stop fraud.
Sir Donald Brydon, who conducted a review into the audit giants last year, said: ‘Reform is necessary because it’s essential that there’s trust in companies and their accounts’, adding that this ‘underpins the mechanics of our entire system’.