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Resigning and audit SNP |accountingweb
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The pivotal significance of resigning as auditor

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Resigning an audit is not a step to be taken lightly. Therefore, Johnston Carmichael’s decision to step back from the SNP audit is momentous.

13th Apr 2023
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While auditors constantly resign, that usually happens when they are asked to do so by a client or decide that a job is uncommercial or perhaps even outside their skill set. Doing so because you no longer trust your client is still something of a rarity.

That point became only too apparent last week when Scotland’s largest independent firm, Johnston Carmichael, hit the headlines after announcing that it would no longer audit the Scottish National Party (SNP).

The SNP accounts for the year ended 31 December 2021 were signed off on 30 June 2022. They showed gross income of under £5m, confirmed that the party was a going concern and were not qualified. But the treasurer’s financial review did contain a statement that appears to refer to the party’s controversial campaign war chest: “By 31 December 2021, a total of £740,822 had been raised through the independence-related appeals. These donations are also included in – and have been reconciled with – the total amount for donations included in party accounts from 2017 to 2021. Up until 31 December 2021 a total of £253,335 of expenditure had been applied against this income. The balance remains ‘earmarked’ for independence-related campaigning.

“Of course, the SNP is the party of independence and, as such, every action we take – directly or indirectly – is in support of winning independence. However, we continue to take a very strict approach to ensuring that this income supports expenditure directly related to the campaign for independence. We will ensure that an amount equivalent to the sums raised from these appeals will go directly to our work to secure a referendum and win independence.”

In a landscape where politicians regularly talk in billions of pounds, these amounts are chicken feed but they certainly have a disproportionate ability to cause chaos.

Readers might be interested to note that the audit fee rose in the year from £26,290 to £57,235. This might seem unusual given that income was broadly static but could be connected to additional work auditing campaigning costs, which obviously go through the roof in an election year.

Momentous decision

In what is now a relatively long career at firms from very small to surprisingly large, this accountant was never aware that any firm with which he worked had resigned an audit due to a disagreement with one of its clients. 

There must have been occasional conversations about the benefits of ongoing work to certain clients, for example, an armaments manufacturer that made front-page news due to services rendered to an overseas power. However, even they remained on the roster.

The most likely reason for a resignation of this type would be a client who refused to prepare accounts that the auditor regarded as true and fair. Close behind would be difficulties in agreeing that accounts should be qualified, which could potentially spell the death knell for the client.

One can just imagine the lengthy conversations that took place between Johnston Carmichael partners behind closed doors before they took their momentous decision.

On the plus side, it gave the firm considerable publicity. Looked at differently, it is highly likely that the practice has many clients who are closely affiliated with the SNP and they may be less than chuffed, with the risk that some will also seek to change auditor.

A matter of timing

In this particular case, the surprise may be more the timing as much as the announcement itself.

Those in Scotland will have been following the story more closely than we Southerners but there have been articles in national newspapers for quite some time suggesting that large donations to the party may not have been accounted for correctly, in connection with another Scottish referendum vote aka Indyref 2.

Despite the explosion of news coverage in the past few days, nothing new has emerged, although the police did arrest and then almost instantly release the former chief executive, Peter Murrell, a man somewhat unkindly always identified by reference to his wife, Nicola Sturgeon.

The amount that may or may not have been accounted for appears to go back some years and therefore one would imagine that it would have come onto Johnston Carmichael’s radar during one or more of its audits. It transpires that the resignation took place six months ago, even though the news was only released after the police set up camp in Murrell’s front garden.

In any event, Johnston Carmichael has taken a brave decision, since one fears that the average firm will turn a blind eye wherever possible, rather than causing a massive fuss (and losing what could be significant fees in the longer term) by resigning an audit.

In the current climate, you can’t help but wonder whether auditor resignations should be rather more frequent. After all, there have been several recent news stories referring to firms that are obliged to settle claims from liquidators for indeterminate amounts that could run into hundreds of millions of pounds and others questioning probity around large-scale fraud. Presumably, in such cases the firm’s partners must regret continuing to audit rather than stepping back at the first sign of trouble.

Replies (9)

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By Hugo Fair
13th Apr 2023 22:35

"there have been several recent news stories referring to firms that are obliged to settle claims from liquidators for indeterminate amounts that could run into hundreds of millions of pounds and others questioning probity around large-scale fraud. Presumably, in such cases the firm’s partners must regret continuing to audit rather than stepping back at the first sign of trouble"
... that's a tad naïve isn't it?

There's no sign that the majors regard such settlements/fines as anything other than one of the normal (if annoying) costs of running the business.
And are no doubt carefully included in the planning models used to tweak forecast gains & losses (alongside the margins available from existing and from newer clients).

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Replying to Hugo Fair:
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By AndrewV12
18th Apr 2023 11:27

Did the auditors walk away on their terms before they were pushed out for audit shortcomings, who knows, not me.

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By jon_griffey
14th Apr 2023 14:03

So auditors walking away from a difficult audit is the noble thing to do?

I don't want to refer to the SNP case as I don't know the detail, but if a firm encounters things amiss in an audit, surely the 'brave' thing to do would be to stand firm and issue a severely qualified audit report and if they then get sacked, so be it. But we never see this do we?

If I appointed a surveyor to look at a property, I would expect them to give a warts and all report, not bend over backwards to give a positive opinion, or turn a blind eye. I would certainly not expect them to resign from the engagement if they think the house might fall down. The same doesn't seem to apply to auditors.

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By 2TunTed
18th Apr 2023 09:44

'In any event, Johnston Carmichael has taken a brave decision, since one fears that the average firm will turn a blind eye wherever possible, rather than causing a massive fuss (and losing what could be significant fees in the longer term) by resigning an audit.'

I am not in a position to speculate about the decision taken by Johnson Carmichael, but if this is really how the average firm approaches audit work then it shouldn't be a surprise to anyone that so many firms are fined and that the audit has so little credibility and that there is a constant stream of failures where something should have been said publicly but wasn't.

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By Duggimon
18th Apr 2023 09:44

I don't believe Johnstone Carmichael have given a reason for their resignation, nor have the SNP, both have just confirmed that it happened and happened well before there were any press reports of the possible impropriety.

Now, it would of course be surprising to learn that the current investigation and the resignation are not linked, however if there were issues around the SNP's accounts that the auditors disagreed with so strongly that they resigned from the post, it is a rather extreme stance to impugn the auditors' integrity in an article like this by suggesting they would still give an unqualified opinion while still disagreeing so strongly that they could no longer continue in the post.

Could it be that the complexities and risks involved in auditing a political party currently in power, along with the increased focus on the profession as a whole meant Johnstone Carmichael were left with the option of substantially increasing fees again beyond the near 100% jump in the last year or resigning, and the SNP with their rather modest income and outgoings were unable to accept the jump in fees?

That's one possible alternative reason and seems plausible at least, more plausible than the implication that borderline criminal financial misrepresentations were being made, were uncovered by the auditors, but did not make their way into the audit report in any way and instead the auditors signed off and then resigned.

For the record, I have no doubt Murrell is guilty of some sort of financial mismanagement but people should be careful of suggesting the auditors were aware of this and resigned as a result as they did still sign off on the period they did audit with no qualification, and suggesting they did so while aware of actual criminal malfeasance is unreasonable and possibly libellous unless there's any actual evidence to suggest this is what happened.

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By Blofeld
18th Apr 2023 10:28

Johnston Carmichael probably had major reservations about the accounts for the SNP for probably two years ending 31 December 2020 and 31 December 2021 at least. Since they resigned in October 2022, having signed off the accounts just four months earlier, they had privileged "inside knowledge" that the brown stuff would hit the fan in the not too distant future.
Whilst they may be regarded as prudent in resigning as auditors, I would have been more impressed if they had qualified the accounts to 31 December 2021...but we all know what would have happened then, don't we?

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By AndrewV12
18th Apr 2023 11:32

Fear not one of the big four could step in and take over the appointment,possibly just what the SNP need a no questions, no quibble audit report (another possible insufficient auditing report).

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By tstock
18th Apr 2023 11:56

Hi - It should be noted that the audit standards (specifically ISA 210 para 6) require the "preconditions for an audit to be present".

The preconditions include:
"Obtain(ing) the agreement of management that it acknowledges and understands its
responsibility:
(ii) For such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and (Ref: Para. A16–A19)

(iii) To provide the auditor with:
a. Access to all information of which management is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;
b. Additional information that the auditor may request from management for the purpose of the audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it necessary to obtain audit evidence. "

If the preconditions for an audit were not there - then JC were right to resign.

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By Mr J Andrews
18th Apr 2023 13:09

As a true Scot would say ''.......there's no Reek without Aodh.......''
It's a pity that the police had to set up camp in Murrell's front garden. Much more comfortable, I would have thought, to commandeer the luxury mobile home { a cool £110K apparently } - purchased apparently from SNP funds - which they took from outside the Fife front garden of Murrell's mother ; or as Philip may identify unkindly as Nicola Sturgeon's mother-in-law.

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