SBC’s Auditors Sanctioned

SBC’s Auditors Sanctioned

by TIM HICKS and NIGEL WARD

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Scarborough Borough Council (SBC) has for many years been audited by MAZARS LLP.

So it will come as a surprise to our readers that the accounting regulator, the Financial Reporting Council (FRC), has sanctioned MAZARS over the quality of an audit it conducted of an unnamed local authority in 2019/20, with a fine of £¼M:

“Sanctions against Mazars – January 2022

Pursuant to the Auditor Regulatory Sanctions Procedure, and following an inspection by the Financial Reporting Council (FRC)’s Audit Quality Review (AQR) team, the FRC’s Enforcement Committee (the Committee) determined on 22 October 2021 that Mazars LLP had failed to comply with the Regulatory Framework for Auditing in its audit of a local government authority’s 2019 financial statements. The most significant failing was in respect of the PPE* valuation, where there was insufficient and undocumented challenge of the accounting treatment for refurbishment costs in the valuation of the authority’s dwellings which could indicate a material overvaluation. Other areas of concern included the first-year independence, group oversight and quality control. The Committee considered that it is necessary to impose a Sanction to ensure that Mazar’s Local Audit Functions are undertaken, supervised and managed effectively. The Sanction proposed by the Committee, and accepted by Mazars LLP, was a Regulatory Penalty of £314,000 adjusted by a discount of 20% for co-operation and admissions to £250,000. In addition, the Committee accepted written Undertakings given by Mazars. The FRC’s AQR will monitor compliance with the Undertakings and report to the FRC’s Supervision Committee and the relevant RSB as appropriate.”

*Property Plant and Equipment

According to The Times newspaper, the FRC found that the audit “fell far short of the applicable standards and regulations” and had the potential “to undermine confidence in the standards in general of registered auditors”.

Very severe criticism indeed.

The press release did not reveal which Local Government Authority the sanction related to. So Tim wrote to SBC Leader, Councillor Steve “Openness & Transparency” Siddons, in the following terms:

Dear Comrade Siddons,

I read with some concern the article below.

https://www.frc.org.uk/auditors/audit-quality-review/auditor-regulatory-sanctions-procedure/sanctions-against-mazars-january-2022

Please can you:

• • Confirm that the failings by the Council’s auditors Mazars, do not relate to their audit of SBC.
  • Confirm that Mazars are still appointed as SBCs auditors.
  • Provide a media statement on these matters.

I thank you in anticipation of your assistance in these requests.

Yours sincerely,

Tim Hicks

Needless to say, in accordance with SBC’s policy of retaliation and media suppression of anyone that criticises SBC, Councillor Siddons did not respond to Tim’s enquiry.

The NYE also wrote to both the London Office and the Leeds Office (which manages the SBC audit) of Mazars in similar terms and also received no reply.

This silence strikes us as somewhat deafening.

Audit firms are supposed to have strong internal procedures for Quality Control and Internal Review, to prevent sub-standard audits. MAZARS has undoubtedly implemented such procedures.

The concern must be that MAZARS’ procedures intended to ensure that local authority audits are undertaken, supervised and managed effectively are systemically inadequate. If this is the case, then it does not matter if the report concerns the 2019/20 SBC external audit or not; if these failings are systemic, the SBC audit could also have been performed to a similarly low standard. In possible mitigation, it should be said that MAZARS’ performance may have been compromised by the accuracy of the information made available by the relevant s.151 Officer.

However, this is not the first time that MAZARS have been the subject of controversy.

The Whitby Harbour fiasco

Regular readers will be aware that Scarborough Borough Council’s accounts have not been signed off since the 2015/16 Council financial year.

The prime cause of this five-year delay rests with the legal action brought by the Fight 4 Whitby group against the Council over Whitby Harbour revenues which, the group contends, should have been ring-fenced for re-investment in Whitby Harbour. Said revenues have instead been ‘absorbed’ into the Council’s General Fund.

There are two points at issue:

1. The precise location of the boundary of the Whitby Harbour lands, which defines what revenue sources should accrue to the (ring-fenced) Whitby Harbour Undertaking account.
2. How far back to go in re-allocating revenue from the Council’s General Fund to the Whitby Harbour Undertaking account.

It is unclear how much money is involved. Estimates vary from £5-10M to £60-70M. Obviously, the larger the sum, the greater the impact on the Council’s ability to set a Budget. The 2022/23 Budget is due to be set at the meeting of Full Council to be held on Monday 24th January 2022.

On 26^th March 2021 MAZARS wrote to SBC instructing the Council to resolve the issue by obtaining a Court Ruling, so that the accounts could be finalised. SBC took no action.

In July 2021, MAZARS again wrote to SBC, again instructing the Council to resolve the issue by obtaining a Court Ruling and again SBC took no action, though Councillor David CHANCE [Con.] revealed that the Council was attempting to challenge the MAZARS instruction.

Finally, MAZARS again wrote to SBC stating that the Council must petition the Court – or MAZARS would do so.

The NYE understands that SBC has been typically secretive and Officers have not divulged to opposition Councillors what action – if any – has been taken, or is intended to be taken.

Certainly a situation where a public body has not had its accounts signed off since 2015/16 is unacceptable (particulartly in the case of SBC, who should be finalising its affairs ahead of its abolition in April 2023, when the new North Yorkshire Unitary Council takes over its assets and liabilities. Clearly, this should not have been allowed to drift on for so long – which state of affairs can only be ascribed to the present leader, Councillor Siddons.

The Ben Marriott Whistleblower Scandal

Regular readers will remember the scandalous treatment meted out to courageous SBC whistleblower, Ben Marriott, who spoke out against corruption in SBC and was forced out of his job.

His Honour Judge Humphrey Forrest and two other Judges passed Judgment on his claim, commenting that SBC’s investigation was “a complete whitewash”, found that Ben Marriott had been unfairly dismissed for speaking out against corruption and awarded him six figures in compensation.

It emerged that Council Officers had misled Councillors as to both the procedures and the facts of the case – thereby deliberately whitewashing a complaint about misuse of Council resources. As a result, a loyal Council worker was forced out of his job.

All of the Council’s control functions (HR, Legal and Finance Departments) were criticised in the Judgment, as was the Asset Recovery Manager. The Irregularity Response Team (the Chief Executive, s.151 Officer, Monitoring Officer, HR Manager, Audit & Fraud Manager) failed to execute their functions properly and the investigation was inadequate from every perspective – the implication being that SBC’s corporate governance has failed catastrophically and was unfit for purpose.

Mr Marriott is a tough and principled man of character and integrity; the authors have great sadness over the way he has been treated and the price he has had to pay for standing up for his principles and the public interest. The treatment he received from SBC was a disgrace and despicable by any standards.

It was obviously in the public interest that this matter was brought out into the open. The fact that it emerged was largely because:

1. Mr Marriott had the strength of character and determination to take the case to Court, where his case was investigated fairly.
2. The North Yorks Enquirer stuck with this story and kept it in the public eye from August 2013 onwards.

In response, SBC called in MAZARS to review the outcome of Ben Marriott’s Court claim and the way in which the Council addressed the complainant’s allegations.

The scope of MAZARS’ 2017Report is set out below:

The role of Mazars in the Marriott scandal causes the authors some concern for the following reasons:

• Mazars set their own terms of reference for the review. This is a function of management, not the independent auditor.
• The key statement by Mazars above is: “A review of the outcome of the employment tribunal is a matter of legal opinion and is therefore outside our professional competence”. This is correct and therefore, in the authors’ view, MAZARS should not have undertaken this assignment. Nevertheless, it did so and – and had the temerity to contradict the findings of the Court, claiming that there was no whitewash, only procedural errors.
• Having a strong whistleblowing policy is an important financial control. MAZARS had signed-off that SBC had satisfactory financial controls when, in fact, it did not. Consequently, MAZARS had a conflict of interest and should not have accepted appointment in what was to some extent an investigation into its own work.
  MAZARS already had an existing commercial relationship with SBC and the review would have been better performed by a judge or a completely independent organisation.
• As a result of the MAZARS review, no action was taken against any SBC employee.

MAZARS were severely criticised in the NYE at the time. The Marriott investigation may be another example of a MAZARS assignment which served to “undermine confidence in the standards in general of registered auditors” and fell short of the standards the public has a right to expect.

If so, this latest revelation by the FRC vindicates the NYE’s coverage at the time.

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