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Every Little Helps… October 5, 2014

Posted by Audit Monkey in The Joy & Pain of Internal Audit.
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Well, it’s been an eventful few weeks and some interesting ‘accounting’ headlines, (if there could ever be such a thing!) The big news was the overstatement of profits at Tesco’s by some £250m. This has precipitated a frenzy of comment and analysis in the financial and popular press and I thought I might as well join in.

First a brief recap, which can be read here. For our overseas readers, Tesco is a leading food retailer in the UK and dabbles in financial services as well. It has a bank and an insurance arm. In late September, the firm announced that profit forecasts were inflated by £250m. The firm’s auditors, PWC, are under the spotlight as they did not raise any concerns. The management team have called in Deliotte and Freshfields (solicitors) to perform an independent investigation.  The Financial Conduct Authority has also been called in, and the FRC (Financial Reporting Council) is also considering participating in any investigation.

Many questions have been asked; some of them are quite amusing. Ignoring any Schadenfreude:

i) Why were the FCA called in? My initial reaction was ‘what has this got to do with them?’ But given the financial services element, they’ve rocked up. They must be rubbing their hands with glee; more rotten firms to regulate and throw the book at.

ii) The following question was posed by Allister Heath in the Telegraph; “What happened to the company’s audit function, internal as well as external?” Quite.  While Allister points the finger at PWC (read the full article here), where were Internal Audit?  I’m speculating but I suspect Internal Audit have looked at ‘income recording’ rather than ‘revenue recognition’, done some perfunctory testing and found nothing wrong.  As the Accountants amongst us will know, there is a subtle but big difference between income recording and income recognition.  I’m not surprised the Internal Auditors didn’t detect anything as the majority aren’t qualified accountants.  Second, it’s is all too easy to forget the Accounting Standards and the basics of financial reporting as Internal Auditors by their nature, will alway tend to focus on controls and the quality of supporting documentation. Hence, they fall into the trap of not considering other factors that may have an impact on the area under review. Also, Internal Auditors often don’t take a holistic approach due to lack of business knowledge and awareness.

iii) Why have Deliotte been called in? As a delicious article in the Evening Standard reminded everyone that DT’s track is not a good one. Let’s not forget:

– the £14m fine for failing to manage a conflict of interest over collapsed MG Rover, i.e. providing advice to the Phoenix Four while being auditors of the car manufacturer;
– signing of the accounts of RBS in 2008 prior to the bank’s collapse. What ever happened to the concept of going concern?
– it’s involvement with Autonomy, and a large write-down of $11.7 billion after being acquired by HP.

The list goes on but I will tell why DT have been selected. If they are this poor at auditing and providing professional advice, there’s a fair chance they won’t find much more at Tesco. Management have chosen wisely.

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Comments»

1. ITauditSecurity - October 8, 2014

AM,
I couldn’t agree more. DT is sad. But the other big 4 aren’t much better. Overall, I’ve had the best luck with KPMG and EY, in that order. But IMHO, DT is the bottom of the bunch.

2. Dale - January 6, 2015

very nice article, if that is the error of the firm then it would vastly effect it’s credential. so out of topic if anyone want’s to have a credible Auditing Services Dubai , look for farahat & co chartered accountants.


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