EY's resignation as Asda's auditor highlights importance of personal compliance

On January 27, it was reported EY had quit as auditor to Asda amid one of its senior partners starting a romantic relationship with billionaire chief executive Mohsin Issa.

Despite EY’s assertion that the partner in question had never carried out any work related to Asda’s audit, the situation has highlighted the potential for perceived conflicts of interest.

“Asda’s failure to disclose the resignation of its auditors, whilst under intense public scrutiny for the running of the business, highlights once again the complete disregard for the importance of transparency,” says Nadine Houghton, national officer at the GMB Trade Union.

Although the accountant told Asda of its decision back in July, the grocer has not made any public announcement regarding EY’s exit in filings to Companies House or in senior management’s recent questioning by MPs.

The supermarket claimed it had informed lenders about its listed bonds in August and a source close to Asda said the accounting firm had formally confirmed there were no reasons behind the exit that should be highlighted to creditors or investors.

EY confirmed the partner had resigned from the company and that she had never carried out work related to the supermarket’s audit. Filings revealed she left as a partner the day after the firm stepped down as Asda’s auditor.

An escalating trend

On January 29, reports out of the US detailed that Big Four firms had admitted hundreds of violations designed to protect the independence of their audit work.

US regulators require audit firm staff and their immediate family to make thorough financial disclosures, for example of their investments, and they ban employment and financial relationships with audit clients that could impair the firm’s independence.

According to reports in the Financial Times, PwC had identified 129 breaches of independence rules affecting 74 clients. Meanwhile Deloitte had previously disclosed 129 breaches, impacting 78 clients across its work in 2022 – this equates to 3% of its audits.

Compliance is a must

Personal compliance rules are designed to prevent conflicts of interest and maintain the integrity of the auditing process.

In the case of EY and Asda, the relationship between the CEO and a senior partner at the auditing firm raised questions about the impartiality of the audit.

Partnership agreements within auditing firms typically include clauses that address potential conflicts of interest. These agreements are designed to protect the integrity of the audit process and the reputation of the firm.

However, the situation with EY and Asda underscores the importance of not just having these agreements in place, but also ensuring they are adhered to.

In this case, EY stated that its resignation was related to a restructuring of the Issa brothers’ businesses. However, the timing of the resignation – the day after the partner involved in the relationship with Mohsin Issa resigned – has raised eyebrows.

What are the rules?

Personal independence rules for auditors are designed to ensure that auditors can perform their duties without any conflicts of interest or biases that could affect their judgment. These rules are crucial in maintaining the integrity, objectivity, and professionalism of the auditing process.

Key aspects of these rules include:

1. Financial independence: Auditors should not have any significant financial interests in the clients they audit. This means they should not own shares or have substantial investments in these companies. In some jurisdictions, there are specific thresholds for what constitutes a significant interest.
2. Employment relationships: Close family members (like spouses or children) of an auditor should not be in a position in the audited entity where they can exert influence over the subject matter of the audit.
3. Business relationships: Auditors must avoid any business relationships with a client outside of the audit engagement that could impair their independence. This could include consulting services, legal advice, or any form of financial or managerial involvement.
4. Long association with an audit client: Regulations often limit the number of consecutive years an auditor can work on the same client’s account to prevent familiarity threats. After this period, the auditor must rotate off the client for a specified duration.
5. Gifts and hospitality: Auditors should not accept significant gifts or hospitality from their clients, as this could appear to compromise their independence.
6. Non-audit services: Providing non-audit services to audit clients can create a self-review threat. Consequently, there are often restrictions on the type and extent of non-audit services that auditors can provide to their audit clients.
7. Regulatory requirements: Auditors must comply with the independence requirements set by professional accounting bodies and regulatory authorities, such as the International Ethics Standards Board for Accountants (IESBA), the American Institute of Certified Public Accountants (AICPA), or similar bodies in other countries.
8. Regular independence assessments and declarations: Auditors are typically required to regularly assess their independence in relation to their audit clients and to declare this independence as part of their audit reports.