PIRC has recommended shareholders vote against the reappointment of Ernst & Young as auditors of NatWest Group.
The corporate governance advisory said in a formal voting recommendation ahead of the NatWest Group annual general meeting next Wednesday that its assessment was based on the audit firm’s approach to the so-called expectations gap in audit.
Tim Bush, head of governance and financial analysis at PIRC, said: “The expectations of auditors are very much higher than is pretended. Until these firms recognise that fact, then why should anyone trust them to be able to vote for them?”
PIRC has also recommended that shareholders oppose the appointment of audit giants PWC, KPMG and Grant Thornton during this year’s round of shareholder meetings.
A spokesperson for EY declined to comment on the development.
The row over auditor appointments stems from a recent consultation by the International Auditing and Assurance Standards Board ‒ Fraud and Going Concern last September.
Commenting on the proposals, PIRC chair Alan MacDougall warned the firm was “minded to recommend that shareholders vote against any accounting firm that does not publicly repudiate the assertions in this document.”
PIRC believes that the IAASB is wrong to refer to an expectation gap where the public has misunderstood the function of auditors and placed unreasonable demands on them.
Instead, PIRC argued that the High Court in England and Wales imposed a much tougher responsibility on auditors to detect fraud in its ruling on events surrounding the collapse of Barings Bank.
Moreover, last year the Court of Appeal ruled against leading audit firm Grant Thornton over its bid to set aside an earlier High Court ruling that the firm had committed a “flagrant breach of professional standards” in its audit of AssetCo.
In its response to the consultation, PIRC said the IAASB’s approach was incompatible with the UK legal framework governing audit.
The issue came into renewed focus last month with the release of the UK government’s keenly awaited proposals for a wide-ranging reform of its audit and corporate governance oversight framework.
Audit giant PWC told IPE: “Auditors have always had a responsibility to design their audit to identify material misstatements, whether caused by error or fraud.”
“The proposals in the BEIS consultation paper seek to ensure this responsibility is clearly defined in auditing standards and make sure auditors are transparent when they report on the work they have done to detect material fraud,” it said.
The firm added that it welcomed the recent focus on fraud and audit.
“We support measures that promote high quality audits and, as part of our three-year Programme to Enhance Audit Quality, we introduced additional training for our auditors from our forensic investigations practice about frauds they have investigated and what our auditors can learn from their experiences.”
Neither KPMG nor Grant Thornton responded to a request for comment.