Damning report on audit failures triggers fears of another Carillion

A damning report into company audits will reveal significant failings after corporate scandals that have wiped out thousands of shareholders and left taxpayers footing the bill. 

The bleak review – which the accounting watchdog could publish as soon as this week – comes after the spectacular downfall of Greensill Capital, which counted David Cameron as an adviser until it filed for administration in March. 

The Mail on Sunday can reveal that the Financial Reporting Council’s report will show nearly a third of the company audits it has examined have failed its quality test or have fallen woefully short. 

Dark days: The Financial Reporting Council’s report will show nearly a third of the company audits it has examined have failed its quality test or have fallen woefully short

The failings will deepen concerns auditors are not grilling company directors or poring over their accounts, leaving firms more vulnerable to collapse or fraud. 

The report comes as Business Secretary Kwasi Kwarteng pushes for a major overhaul of corporate governance to protect jobs and shareholders. 

A string of corporate scandals have blighted the UK economy over the past decade, including the downfall of BHS, which cost thousands of jobs and left a black hole in the company’s pension fund. Its auditor, PwC, came under fire for failing to spot the warning signs. 

But senior politicians are concerned that the problem is still rife. The collapse of Greensill Capital has led to an investigation into its auditor, Saffery Champness. 

The FRC is also pushing for a joint-record penalty of £15million against KPM++++G over alleged misconduct over the sale of beds firm Silentnight to private equity. The sale left Silentnight’s retirement pot in the Pension Protection Fund, the Government-backed lifeboat. 

The FRC is still investigating the collapse of Carillion, which went into liquidation in January 2018. 

And the demise of bakery chain Patisserie Valerie in 2019 after the discovery of a £40million suspected accounting fraud put the spotlight on its auditor, Grant Thornton. 

The FRC has scoured a widespread sample of audits from the UK’s biggest accounting firms – PwC, EY, KPMG, and Deloitte – as well as smaller firms BDO, Grant Thornton and RSM. 

It is expected to show a slight improvement on last year in some areas, but it is understood the watchdog will still deem the failings as ‘unacceptable.’ ++++

Last year, firms were slammed for failing to challenge corporate management on their figures and their ability to continue operating as viable companies. 

The report will boost Kwarteng’s call for corporate reforms which he outlined earlier this year, following reviews of the audit industry by city grandees including Sir John Kingman and Sir Donald Brydon. 

Kwarteng outlined proposals to break up the dominance of the big four audit firms. 

He also plans to create a new regulator, giving it stronger powers to split up audit firms to stamp out conflicts of interest. 

Directors of large companies could also face fines or suspensions in the event of fraud or major accounting errors.

Kwarteng told the MoS: ‘These proposals are really important for small shareholders, and even our pension pots, so that people can get an accurate picture of the health of the company they’re investing in.’ 

He added: ‘The collapse of household names like Thomas Cook, Arcadia and Carillion, and the fact that a third of inspected audits of FTSE350 companies last year were not up to scratch all lay bare the stark reality that the current system isn’t working.’