“SBC Auditors Controversy”
As well as covering crime and parliamentary affairs, Tim Hicks is also a Chartered Accountant. The Enquirer asked him for his opinion on the recent Financial Reporting Council report into the quality of the local authority audits performed by, inter alia, Mazars. This was because, in accordance with the high standards of journalism the NYE upholds, the Enquirer wanted to provide our readers with a second opinion from a credible and knowledgeable commentator.
His comments are below in the form of a Letter to the Editor. They are constructive and make interesting reading.
I read with incredulity the article “Birds of a Feather” by Nigel Ward, published in the NYE.
Briefly, this article describes how the Financial Reporting Council (FRC) has performed an Audit Quality Inspection into the three audit firms which have the largest share of major local audits. These are:
- Grant Thornton UK LLP 40.2% (six audits reviewed).
- Ernst & Young LLP 26.6 % (three audits reviewed).
- Mazars LLP 15.5% (two audits reviewed).
The Financial Reporting Council (FRC) Audit Quality Inspection
The two local authority audits performed by Scarborough Borough Council’s (SBC’s) auditors Mazars were both found to be “unacceptable”. Here, I quote:
“Both audits reviewed by the AQR were assessed as requiring significant improvement. This is clearly unacceptable and follows a trend of poor inspection results.”
The trend referred to was assessed over a review period of five years. The full report can be accessed here, along with Mazars response to the FRC report on page 17 and 18.
Grant Thornton and Ernst & Young both performed significantly better than Mazars.
When I read this, I was shocked. Mazars are a good firm and has a fine reputation. Until recently, I used them as a client and I was always very happy with their performance.
How can this have happened?
Assessing the above results:
- If Mazars produced one audit that was rated “Improvements Required”, it would have been excusable. Should this happen, I would expect that there would be a full internal review of what went wrong, corrective action would be taken and the next year’s report would be at the level of “Good or limited improvements required”, as its clients have a right to expect.
- If the FRC had only reviewed one set of Mazars accounts, I would conclude that it was a ‘one-off’ failing.
However, this assessment relates to two audits over a five year period, none of which have met the normal standard of “Good or limited improvements required”. So this cannot be written off as a single ‘one-off’ isolated incident.
Normally, the core audit programme would be centrally drafted to ensure that every audit of a local authority performed by the firm was conducted to a common standard, that the program was up to date for changes in legislation, regulation and codes of best practice, and complied with the firm’s Audit Quality Plan. The standard audit program would then be adjusted to take account of the specific requirements of the client. Once the audit was completed, the audit would be subject to three separate levels of review, one after another, to ensure a high quality audit had been performed:
- Review by the audit manager;
- Review by the audit partner;
- Engagement Quality Control Review, conducted centrally.
This should ensure that it would be impossible for the audit to be anything other than “Good or limited improvements required”. However, this appears not to have happened. So the overall concern must be that these results may represent a systemic failure of Mazars to perform local authority audits to an acceptable standard across all engagements.
To be clear, it should be said that there is no evidence that SBC statements were considered by the FRC. It should also be said that it is possible that the audits of SBC’s statements by Mazars may in fact have been to the required “Good or limited improvements required” standard that SBC Council tax payers are entitled to expect. However, given the above findings, this seems questionable.
Mazars: Other controversies, Nigel Ward vindicated
Mazars have been SBC’s auditors for many years. Mazars was widely criticised over its investigation into the Marriott whistleblowing scandal, which exonerated the Council and has been widely criticised as a “whitewash”.
In my view auditors should not do consultancy work and I criticised Mazars for undertaking the work at the time (2016). I felt at the time they should not have taken on the Marriott investigation for the following reasons:
- Having a strong whistleblowing policy is an important financial control. Mazars will have signed off that SBC had satisfactory financial controls as part of previous audits, when in fact it did not. Consequently, Mazars had a conflict of interest in performing the Marriott review.
- Having performed a lot of local government audits in the past, Mazars will naturally be sympathetic to the employees of public bodies. This could potentially be perceived to undermine their independence and credibility.
- Mazars set the terms of the review, which excluded major areas of concern.
- SBC is a democratic local government organisation. Sufficient concerns had been raised locally in the press (Scarborough News article here) and by Councillors about having the auditors conduct the inquiry, that irrespective of any other issues, this damaged the credibility of the review. It would have been better if Mazars had respected the views of local people – and elected Councillors – and declined appointment, thereby foregoing the £14,000
As a result of the Mazar’s review, no Council Officer was disciplined for their despicable treatment of Ben Marriott.
The Judgment – and the Mazars review of it – can be read in this article by Nigel Ward, which is highly critical of the review: Marriott: Mazars Review
Ben Marriott’s concerns on the Mazars review can be read in this article: Ben Marriott Open Letter to SBC.
The review is covered impartially in this very good Scarborough News article: Scarborough Council cleared in corruption investigation.
Brave SBC whistle-blower Ben Marriott, who spoke out about SBC corruption and was hounded out of his job as a result. He subsequently received a £95,000 settlement from SBC.
In his recent article, investigative journalist Nigel Ward also criticised Mazars for not understanding the Local Government Act 1972 over its failure to sign off accounts since the 2014/15 Council Financial Year:
“(It is disappointing to note that local government specialist MAZARS refers (at that third last bullet point) to the Local Government Act 1974. In fact, the relevant legislation is, by its correct title, the Local Government Act 1972, which only came into force on 1st April 1974).”
In its response to the FRC Report, Mazars stated:
“We recognise that our engagement quality control reviewers need a broad understanding of the particular complexities and nuances of the local government and NHS sectors, as well as emerging audit and financial issues relevant to those sectors. Therefore, from the March 2021 year-end audits, all engagement quality control reviewers who do not have significant sector expertise will attend a mandatory sector briefing, provided by the Audit Quality Team.”
So Nigel must be gratified that his concerns about Mazars understanding of local government audits and legislation have been vindicated in the report – again giving further evidence of the quality of the NYE’s analysis and investigative journalism.
Where does SBC go from here?
Be that as it may, the issues now facing SBC are of ‘value for money’ and credibility.
To quote the FRC report:
High quality audit is essential to maintain stakeholder confidence by providing an independent, impartial view of a major local audit body’s financial statements and arrangements in place to secure value for money. Poor auditing may fail to alert management, the public and other stakeholders to material misstatements (including those arising from fraud) or financial control weaknesses, in those cases where management have not identified or appropriately amended them.
If indeed Mazars have routinely been publishing sub-standard audits, then that means that the good Council Tax payers of the Borough have been paying for a high quality audit and have not received the same.
Further, given that it seems probable there are systemic problems with Mazars ability to perform satisfactory local authority audits, it seems unlikely that these issues will be resolved immediately. Therefore, Mazars may continue to issue unsatisfactory audit reports for some time, which potentially affects the credibility of SBC’s audited financial statements.
Under these circumstances, it is difficult to see how SBC can continue to use Mazars.
In my opinion, it is time for a change and for new auditors to be appointed. This will ensure a fresh look will be taken at the Council’s processes, the audit will be performed to an acceptable standard and that personal relationships between the auditors and the auditees that have been established over many years – and may have become too cosy – will be discontinued.
Putting the audit out for tender will remove any lingering issues of credibility, allow the appointment of auditors that do not have these issues hanging over them and allow the audit fee to be competitively re-assessed, possibly leading to a reduction in costs.
Finally, I would like to close on a positive note by expressing once more my admiration for Mr Marriott and the way the North Yorks Enquirer has upheld the public interest by keeping this issue in the public eye. This perfectly demonstrates the importance of a strong, vibrant free press that holds public bodies and their auditors to account.
Tim HICKS, Luxembourg. 4th of November 2020.
The Leeds Office of Mazars was asked for an audit comment but did not provide one by the time of publication. Should one be received subsequently, it will be published.
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