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Audit and accounts

One of the areas of policy outreach we have been particularly active in recently is that of accounting and audit.

As long-term shareholders on behalf of our clients, we have two core beliefs:

  • The audit system needs strengthening such that it delivers a reliable opinion on the quality of management’s accounts
  • There are flaws in the accounting rules which need addressing, so that shareholders can tell what share of the reported profit has been realised and how reliable capital is

Where are we now?

Following the collapse of Carillion in January 2018, the role of auditors and accounts is getting some deep scrutiny. We have drawn attention to the failure of the regulator, the Financial Reporting Council (FRC), in enforcing legal requirements for audit and accounts, and in March 2018 it was announced that they are to be probed by an independent inquiry. We will be doing our best to ensure they follow through with substantive reform.

A long-term engagement

We have been working on these issues for some years, often with an evolving coalition of other investors, asset owners and academics/thought-leaders.

November 2018 - Beware of quick fixes to the audit market

We wrote to the Financial Times, highlighting the risks of the government trying to fix the audit market without first determining what the market is there to do. We believe a core function of audit is to protect capital. Auditors see their role as implementing accounting standards. These are sadly not the same thing.

Read our letter (subscription required)

November 2018 - Sarasin & Partners response to Kingman review of auditor procurement

We have submitted a further response to Sir John Kingman, who has extended his review of the Financial Reporting Council to consider current arrangements for the procurement and scope of company audits.

Consistent with our recent input into the Competition and Market Authority’s investigation into the audit market, we call for a clarification of the purpose of audit to ensure that capital protection is restored to audit scope and procurement. We also propose a number of changes to the current model for audit procurement and delivery in order to strengthen the accountability of auditors to shareholders.

View our letter

November 2018 - Our submission to the Competition and Markets Authority (CMA) review of the audit market

We met with the CMA to input into its review of the statutory audit market. We argue that the purpose of audit, which is to support capital protection, must be clarified prior to any interventions designed to increase competition and outline a number of proposals to help provide this.

Read our submission

September 2018 - How to solve the auditing crisis at the Big Four

The Big Four accounting firms have been hit by scandals, and regulators, investors and the public have lost confidence in the audit market. In this video, the Financial Times examines what went wrong, and what might restore faith in the profession.

Watch video

August 2018 - Our response to the independent review of the FRC

We responded to the Government's independent review of the Financial Reporting Council (FRC), which oversees audit and financial reporting the UK. Building on the paper we published alongside other investors last year, our submission outlines the need for a strong and independent regulator responsible for ensuring companies are behaving in the public interest.

Read our response

May 2018 - What is an audit for?

The Economist published an article debating what an audit is, and the differing expectations lawmakers, auditors, investors and courts have when it comes to requirements. Natasha Landell-Mills' analogy of a homebuyers' survey is used -  It may not guarantee there will never be a leak, but it should give reasonable assurance that there are none. She wonders if some auditors are skipping the most basic checks.

Read the article

May 2018 - BP under AGM spotlight over climate risk assumptions

Given the expected long-term structural decline in oil and then gas demand associated with global decarbonisation efforts, we are keen to see companies that are likely to be materially impacted to stress test their business models and accounts for any downside risks. We see no clear evidence that BP is doing this and asked BP to explain their approach on this.

Sarasin & Partners worked together with the IIGCC to produce a discussion paper around voting for better climate risk reporting.

Read the discussion paper

May 2018 - Big four accountancy firms plan for forced break up

Natasha Landell-Mills is quoted in the FT in an article discussing the potential break up of the UK's big four accountancy firms.

Read the article

May 2018 - Investor coalition's letter to Secretary of State Greg Clark

Sarasin & Partners LLP and other investors have written to the Secretary of State for Business, Energy and Industrial Strategy, Greg Clark, to first welcome the independent review he announced into the Financial Reporting Council (FRC); and second to set out the importance of contextualising FRC reform as just the first step to addressing deeper problems with accounting and audit in the UK.

Read the letter

March 2018 – Should the Big Four accountancy firms be split up?

Natasha Landell-Mills joins the debate in the Financial Times on how best to reform auditing. Natasha's argument supports the notion that separating audit from consulting would prevent conflicts of interest.

Read the article (subscription required)

March 2018 – Watchdog urges inquiry into break-up of big four accountants over audit role

Natasha Landell-Mills is quoted in the Financial Times as the FRC recommend an inquiry as to whether the Big Four accountancy firms should be broken up, due to the quality of their audit work and conflicts with other interests.

Read the article (subscription required).

January 2018 – Carillion’s woes may point to a much deeper problem

Head of Stewardship, Natasha Landell-Mills, and other signatories wrote to the FT regarding the collapse of Carillion, honing in on the real culprits behind the company's demise, and calling for the government to better scrutinise accounting rules.

Read the letter (subscription required)

November 2017 – Timelier provisions may make banks’ profits and lending choppier

The Economist published an article about the introduction of a new international accounting standard called IFRS 9. This will oblige lenders in more than 120 countries to increase provisions for credit losses. Head of Stewardship Natasha Landell-Mills expresses concern in the piece over whether it is too little, too late for banks.

Read the article

October 2017 – Investors require a robustly independent audit regulator

Our latest position paper, recently referred to in the Times, calls on the government to address failings in the Financial Reporting Council through structural reform that establishes an independent body, a clearer and more complete statutory basis ensuring full accountability to Parliament, robust governance structures, independent funding, and full public transparency.

Read our position paper

October 2017 – Frustration with the FRC grows

As shown in the recent article by the Evening Standard, frustration with the FRC’s repeated failure to demonstrate robust oversight of the audit profession is growing. While no surprise to us, we expect this to continue to increase, and our goal is to put forward a constructive set of proposals for a new properly independent regulator.

Read the article

July 2017 – Investors need to know what is real

Natasha Landell-Mills, Head of Stewardship, writes for the Corporate Governance Institute (ISCA), drawing attention to our recent position paper 'Investors need to know what's real' when it comes to profits and capital. She also highlights how directors' interests should be aligned with shareholders', and how improved disclosures will help to strengthen trust.

Read the article

May 2017 – Our latest position paper on accounting standards

CityAM and Economia have published articles drawing attention to our latest position paper, calling for failures with accounting standards to be addressed. The paper was coordinated by Sarasin & Partners LLP and co-signed by a coalition of investors. The core request of the groups is that shareholders should be able to see what portion of profit has been realised, and what part of a company’s capital can be used to pay dividends.

Read the Economia article

Read the position paper

March 2017 – Response to the Government’s Green Paper on Corporate Governance

In a recent submission to the Government’s Green Paper on Corporate Governance, we highlight ongoing misgivings that corporate governance in the UK is being undermined by a faulty accounting and audit system. The submission points out that without reliable accounts and robust audit, the UK will continue to see governance failures like those exposed at BT, Tesco and in large UK banks in the financial crisis. It also calls for the UK to strengthen its regulatory oversight of accounting and audit by splitting the Financial Reporting Council into two demonstrably independent regulators.

Read the letter

February 2017 – Our response to the FRC

We responded to the FRC’s Draft Plan, Budget and Levy Proposals for 2017/18. Our submission, which was supported by the Local Authorities Pension Fund Forum and the UK Shareholders Association, builds upon our recent response to the UK Government’s Green Paper on Corporate Governance. Specifically, we highlight our ongoing concerns around accounting standards and the effectiveness of the FRC itself. We also emphasise proper enforcement of rules around climate risk reporting (drawing on our position paper on this topic).

Read the letter

January 2017 – Clearer picture of banks’ capital is required to help avert crises

Head of Stewardship Natasha Landell-Mills writes to the Financial Times suggesting that accounting rules should be changed so that companies must disclose what profits have been realised, in order to help us forecast and avoid the next banking crisis.

Read the letter (subscription required)

December 2016 – The FRC respond to Lord Hollick

Lord Hollick wrote to the Financial Reporting Council (FRC) in November 2016 to seek clarification on their view of legal uncertainty surrounding company reporting of distributable reserves. The FRC responded on 20 December stating that they are comfortable with Michael Moore QC’s original opinion and they believe the issue can only be clarified by a court, or the government changing the law.

We continue to believe that – putting to one side the legal debate – the requested disclosures of distributable reserves and profits at listed companies is vital for shareholders to understand underlying performance and capital strength at investee companies. We will continue to support efforts to deliver these disclosures.

Read Lord Hollick’s letter

Read the FRC’s response

October 2016 – Promoting reporting that supports long-term stewardship

Head of Stewardship Natasha Landell-Mills participated in a Financial Reporting Lab project exploring best practice with business model reporting by UK companies. The FRC have now released the final report.

View the summary

June 2016 – News from Europe on IFRS

The investor coalition which we are part of is mentioned in this Investment and Pensions Europe article about MEPs challenging the way in which the IFRS is being implemented in the EU.

Read more

May 2016 – Accounting rules that put capital protection in peril

Head of Stewardship Natasha Landell-Mills, along with other investors, writes to the Financial Times outlining how a report issued by the Monetary and Economic Affairs Committee in the European Union reinforces the arguments we have been making about the current accounting rules (IFRS).

Read the letter (subscription required)

February 2016 – Investors in Next critical over dividend disclosure

The Next Plc announcement in January that it paid illegal dividends between 2014 and 2015 due to their failure to disclose in their accounts the relevant distributable reserves comes on the heels of at least seven other similar admissions by FTSE-listed companies. Natasha Landell-Mills comments in the Guardian.

Read more

December 2015 – HBOS review offers the chance to explore the flaws in our accounting system

Our investor coalition had a letter published in the Financial Times saying that the recent review of the HBOS failure should be a trigger to correct the major shortcomings in our financial and accounting system.

Read more (subscription required)

November 2015 – A joint investor submission on the IFRS Conceptual Framework

We recently coordinated a joint submission from a group of long-term asset owners and investors to the International Accounting Standards Board on their proposed Conceptual Framework.

Read the submission

September 2015 – Investor coalition's letter to policymakers

Our investor coalition wrote to the Chairman of the European Parliament's Working Group on IFRS to set out concerns that IFRS have had damaging pro-cyclical impacts for the European Union, and fail to ensure capital protection for shareholders as required under EU law.

Read the letter

February 2015 – Restore prudence as an overriding principle

Natasha Landell-Mills, Head of Stewardship, calls for improved accounting standards within the EU in a letter to the Financial Times.

Read more (subscription required)