The number of UK companies seeking new auditors remains highly buoyant through 2023 continuing to shine a spotlight on the resigning auditors’ responsibilities to issue clear and informative cessation statements under section 519 of Companies Act 2006.
Why does the quality of cessation statements matter?
Preparing and issuing cessation statements should not only be viewed as a legal requirement. A good, quality statement serves the public interest by providing valuable information to successor auditors, regulators and other stakeholders about the reasons and circumstances of the predecessor audit firm’s departure, including possible disagreements or unresolved issues. They are particularly important for enhancing transparency, holding management to account, and supporting audit quality in the profession as they can alert prospective successor firms to potential risks or complexities that may inform their acceptance decisions.
Supporting competition
QAD sees a wide range of quality in cessation statements submitted which is often dependent on the extent of explanations included when the situation warrants more detail. Clear cessation statements by outgoing auditors, combined with clear and robust client acceptance criteria, processes and procedures, support the wider audit quality agenda.
In one example, a detailed cessation was received for a company operating in a niche sector listing a number of matters for consideration. The company approached several prospective audit firms to take on the audit, and one firm we spoke to had declined to tender for the audit as it had determined that the audit did not fit well with their risk strategy and client acceptance criteria, and that it lacked the relevant expertise in the sector. The firm cited the cessation statement as being useful additional intelligence to inform its decision.
The firm that ultimately accepted the audit with approval from its audit risk committee had access to significant expertise relevant to the niche sector within its network, and as part of the decision process, it also critically assessed the other concerns listed in the previous auditor’s cessation in order to form a judgment on whether it would be able to perform a high-quality audit.
This highlights how each firm involved was able to make clear and informed decisions and ultimately, the audit is now with a firm that appears well equipped to deliver a high-quality audit for this client and its stakeholders.
Are fees really the underlying reason for the cessation?
Some firms provide teams with template cessation letters containing a selection of standard reasons to choose from. However, there is a risk that these “boiler-plate” cessation statements submitted are then not tailored to the specific resignation circumstances for each company, diluting their impact and effectiveness in supporting transparency as the audit moves to a new firm.
An ICAEW review of cessation statements received also highlights that for some firms, almost all the cessations received from them in recent months cited exactly the same wording. Firms should ensure that cessations submitted reflect the reason, and that it is tailored as necessary.
The most common reason cited on cessation statements is “fees”. In the majority of cases, this will be a commercially led decision, purely financial in nature, and often as a result of a tender process. However, there are some instances where an audit firm ends up resigning from a challenging audit as the company has a disregard for the requirements of, or an unwillingness to support, a robust audit process and is not prepared to pay for the work required to complete the audit to a high quality. In both these situations, the matter of “fees” is certainly a factor in the resignation but in the latter scenario, consideration should be made on how any prospective successor auditor is made aware of the specific challenges that may be faced, and whether “fees”, on their own, are truly reflective of the situation.
Where else can transparency be improved?
ICAEW has received a few cessation statements identifying circumstances that should be brought to the attention of the members or creditors, but the cessation itself had not been filed at Companies House in line with s521 Companies Act 2006. It is critical that the auditors ensure such statements are filed on public record, so that members and creditors can act upon the information.
We have also come across reissued cessation statements where the revised statement heavily waters down the issues presented in the original. In some, especially complex situations, this may occur following legal advice, but audit firms should take care not to bow to pressure by management to reduce necessary detail if the information would be valuable to any successor firm’s acceptance decisions.
Managing challenging clients
QAD has also seen a four-fold increase in “audit firm decision” as being cited as the reason for resigning on cessation statements. This may be a result of the firm exiting a particular sector, for example, following the retirement of specific responsible individuals (RIs) experienced in that area, or to realign with the firm’s latest strategy, although sometimes the decision to resign will stem from new and difficult challenges faced on the audit which may seem insurmountable. However, when such challenges are identified at an early stage, we have seen good practice where firms are able to work with the company directly, so that they can act on concerns to avoid auditor resignation. We encourage all firms to consider putting early warning mechanisms and communication channels in place to open dialogue and set expectations with management where these challenges occur. Should resignation ultimately still occur, audit firms should ensure they provide complete and transparent information on any required cessation statement and as part of professional clearance.
We will continue to monitor the audits undertaken across ICAEW-registered auditors and contact firms between monitoring visits about particular audit clients, or groups of audit clients. These contact points may take the form of a meeting and/or review of completed audit files and will be in addition to standard audit monitoring visits. The objectives of our work, wherever possible, are to support firms to develop their audit practices and maintain high standards.
Resources
Keep updated
Be the first to know when articles like this are released by following us on LinkedIn and subscribing to our monthly newsletter, Regulatory & Conduct News.
