Comment: Time to put a rocket up the auditors — and their watchdog

Hot on the heels of the announcement of an investigation into PricewaterhouseCoopers’s audit of Tesco, the Financial Reporting Council says it is making food, drink, consumer goods and retail “a priority sector” for audit inspections this year.

Well that’s a relief. Aren’t you glad that auditors have such a dynamic and forward-thinking regulator, keen to be seen to be ahead of the game?

What’s that? You’re saying the FRC is being reactive and not pro-active? You might have a point there.

The Tesco accounting scandal hardly came as a bolt from the blue. A year before new chief executive Dave Lewis revealed that the grocer had a black hole in its accounts, a stockbroker, Cantor Fitzgerland, highlighted problems about the supermarket’s relationship with suppliers in a note which was widely publicised.

That Tesco was an outlier here seems fairly clear. We haven’t — yet — seen other supermarket groups reporting any such monkey business with the numbers.

But problems in the relationships between supermarkets and suppliers generally have been a subject of discussions for a considerable time.

If auditors are good for anything at all, the first question you would think they would have been asking would be about the rebates commonly demanded from suppliers, and how they were being booked. Not just at Tesco, but across the sector.

One of the issues highlighted by the FRC in its annual review of audit quality is “insufficient scepticism in challenging the appropriateness of assumptions in key areas of audit judgements”. Such as? “Impairment testing and property valuations.”

“Supplier rebates” and the booking thereof would seem to be a key issue to add when it comes to the retail sector. But the FRC is only now getting around to looking at it after a major scandal has occurred and just about every agency under the sun is jumping all over the company with investigations and reviews. The Tesco affair, and the wider issue of the relationship between retailers and suppliers raises more questions for the audit industry.

The FRC itself says that 33% of the audits it inspected either required improvement or significant improvement last year. That’s better than the shocking 40% recorded the previous year, but it is still far too high.