Shell audit conflict raises eyebrows at Standard Life

…as the UK’s Financial Reporting Council finalises auditor rules

The Financial Reporting Council (FRC) has published final drafts of the latest UK corporate governance code and the associated guidance on audit committees so they will meet the requirements of forthcoming legislation on audit committees and auditor appointments. This forms part of the UK’s implementation of the EU’s Auditor Regulation and Directive which will come into effect on 17 June 2016.

The FRC has also revised its auditing and ethical standards which supports the work of audit practitioners in delivering high quality audit, and therefore boosts investor confidence. These revisions reflect changes in international standards and the FRC’s own review of ethical matters. The FRC said it had introduced all of the changes in a single revision to standards to ease the process of implementation as well as reduce costs. The FRC said it had issued the final drafts now to enable companies and their auditors to familiarise themselves with the new requirements in good time. The FRC will confirm the final documents and their effective date once all the legislative and regulatory processes associated with implementing the EU legislation are complete.

The changes, the FRC said,  strengthen auditor independence by applying prohibitions to a range of engagements that could result in an auditor facing a conflict of interest. Reflecting the FRC’s commitment to proportionate regulation, the revised standards contain some reliefs which will allow, in certain circumstances, an auditor to provide additional assistance to smaller and medium-sized entities.

These changes come as potential auditor conflict of interest and independence issues have been identified by Manifest in its analysis for Royal Dutch Shell’s AGM next month. Shareholders backed a takeover of the BG Group by Shell in January. Manifest flagged that EY, which has replaced PwC as Shell’s auditor for the 2016 financial year, has served as auditor for BG Group since 2013. Meanwhile EY’s lead partner, Allister Wilson, was the lead partner for BG Group immediately prior to the takeover.

Major UK institutional investor, Standard Life, is concerned about the auditor independence issue the appointment of EY poses. Mike Everett, governance & stewardship director at Standard Life commented that “BG Group’s accounts for 2015 – and early 2016 – still have to be audited by EY and we perceive that their independence, objectivity and scepticism could be compromised. For example, if a material error in BG’s 2014 and 2015 accounts comes to light would shareholders be able to rely on EY to take an objective view on figures they audited?”

Standard Life had opposed the takeover of BG by Shell and following the appointment of EY as auditor, when the firm had also been auditing BG, the fund manager reported in it review of governance and stewardship for 2015 that, “We asked what had been done to ensure safeguards were in place to address any conflicts of interest.  We also engaged with BG and EY to obtain their input into the management of conflicts, and we discussed our concerns with the Financial Reporting Council.

“While obtaining, through our engagement, additional comfort around the future approach and focus of Shell’s audit committee, we continue to have concerns about the appointment of EY as auditors of Shell. We shall continue to focus our engagement on audit quality at Shell,” Standard Life added.

The fund manager had raised issues last year regarding BP’s previous auditor and in its review said it voted against the reappointment of PwC at the 2015 AGM as the lead audit partner, Ross Hunter, had been the auditor of Rio Tinto when Shell’s then audit committee chairman, Guy Elliot, was its chief financial officer. Elliot no longer sits on Shell’s audit committee and its new chairman is Euleen Goh – both are seeking re-election as non-executive directors at Shell in May.

Leave a Reply