Deloitte under investigation over audit of Essar Oil UK
Review by ICAEW of governance disclosures is latest blow to Big Four accountancy group
Deloitte is under investigation over its auditing of Essar Oil UK, the owner of the Stanlow oil refinery that produces 16 per cent of the fuel used on British roads.
Prompted by a complaint in August, the Institute of Chartered Accountants in England and Wales has begun examining whether Deloitte should have raised its concerns about Essar Oil UK’s governance earlier than it did, according to documents seen by the Financial Times.
Deloitte resigned as auditor in October 2020, citing governance concerns affecting Essar Oil UK’s audit strategy. It did not raise such concerns three months earlier when it signed off the company’s accounts for the 18 months to September 2019.
The investigation is the latest UK audit inquiry into Deloitte, which was fined a record £15m last year for serious misconduct in its audit of software group Autonomy.
The Big Four group, which paid its partners more than £1m on average last year, is the subject of separate investigations over its audits of UK outsourcer Mitie Group and building materials company SIG.
The ICAEW is also examining whether Deloitte breached a statutory deadline for publicly filing reasons for its resignation at Companies House. In addition, it is scrutinising how the accounting group dated documents when it did file them almost six months after it resigned.
An auditor resigning over governance concerns is generally required under English law to file a statement of reasons at Companies House within 28 days. Failure to do so may be an offence under the Companies Act.
Deloitte initially filed its statement in November 2020 but it was found unacceptable and was returned, according to a Companies House response to a freedom of information request, seen by the FT.
The correctly filed statement, now available publicly, was not sent to Companies House until April 2021, almost six months after Deloitte resigned. The filing followed reports that Essar Oil UK was in talks to secure new funding and concern among Whitehall officials about the company’s future.
Deloitte said in the statement that “improvements are required to both the control and the governance framework of [Essar Oil UK], in particular regarding loans and advances, in order for the audit strategy to be effective”.
The ICAEW is investigating whether the accounting firm should have disclosed its concerns in its report on the 2019 accounts, as it may have been “aware of matters that impacted on the effectiveness of the audit strategy”, the documents seen by the FT show.
An ICAEW case manager wrote that “given the contents and timing of the resignation statement [relative] to the audit report issued I do have some potential concerns regarding the audit report issued”.
During the period between Deloitte’s resignation in October 2020 and its completion of the filings in April 2021 Essar Oil UK moved to refinance, as demand for fuel slumped because of the pandemic and Lloyds Banking Group terminated a loan facility.
The delay meant potential lenders and other stakeholders such as suppliers may have been unaware of Deloitte’s statement about Essar Oil UK’s governance framework.
“The deadline is there for a very good reason which is that the world deserves to know if an auditor has [resigned over governance concerns affecting the audit strategy],” said Paul Lee, head of stewardship and sustainable investment strategy at investment consultant Redington.
Essar Oil UK, part of an Indian conglomerate, later said it had agreed a payment schedule with HMRC, improved its liquidity and governance and that trading had improved.
The complaint falls to the ICAEW rather than the Financial Reporting Council because Essar is a private company. The documents seen by the FT showed investigators had not yet decided whether to refer the matter to the ICAEW’s investigation committee, which has the power to launch disciplinary proceedings.
The ICAEW said its rules prevented it from commenting on whether any matter is under investigation unless disciplinary action is taken.
The professional body’s case manager said in a document seen by the FT that if Deloitte’s original filing was sent within the time limit then “it is not considered there would be a breach that would require reporting”.
She did not state how long the ICAEW considered a reasonable amount of time to properly complete a filing after the initial version was rejected by Companies House.
Deloitte, which declined to comment, was replaced as auditor of Essar Oil UK by PKF Littlejohn, a midsized firm that took over the audit of retailer Boohoo last year after PwC resigned. Deloitte declined to comment.
Essar said: “Deloitte gave [Essar Oil UK] a clean audit opinion in July 2020, as did a separate independent auditor in 2021.”
The company “has taken extensive action to address the governance concerns raised by Deloitte more than a year earlier, including the appointment of an additional independent director and a commitment to the Wates Corporate Governance Principles”, and its current governance structure is above market standards for a private company, it added.