Accounting Errors at CCC - Post 14/15 in a series - Ernst & Young's Retrospective Objection Investigations

 

14 - Ernst & Young’s Retrospective Objection Investigations

Section 10 above mentioned my four formal objections to CCC’s draft accounts since 2018/19, and EY’s failure to accept or reject any of them.

In October last year I issued EY with a letter before action since, in issuing its audit opinion on the 2020/21 financial statements without considering my 2021 objection, EY had de facto decided to reject my objection.  EY had declined to produce written reasons for that decision under Section 28(3) of the Local Audit & Accountability Act 2014.   

My letter before action did not produce any answers to the questions I put to EY and CCC, but it did prompt EY audit partner Mr Hodgson a few days later to accept not one, but all four of my objections (including for 2022) “on account of the passage of time.”  EY gave itself three months (which became four months) to produce decision notices for all four objections, three of which were retrospective.   

EY sent me its decision notices in March this year.  I consider them to be whitewashes.  In several instances Mr Hodgson ignored photographic and other documentary evidence in the objections in favour of demonstrable untruths he was told by council officers.  He appears to have employed no professional scepticism or professional curiosity in his investigations. 

The legislation is not designed for auditors to investigate objections up to three years after they have issued their audit opinion on a particular set of accounts.  Only a court can overturn an auditor’s quasi-judicial audit opinion.   

So EY electing to investigate multiple objections retrospectively presented a profound conflict of interest at the very least, because the auditor has a vested interest in not challenging his own historical decisions, and also in not producing public interest reports, applications to the court or written recommendations under Section 28 and Schedule 7 of the Act.  Such documents would need to be addressed to the Secretary of State and published by the local authority.   

In respect of the City Deal accounting treatment from the 2021 objection, EY was doubly conflicted because in its two previous audits it was complicit with CCC in supporting the incorrect accounting treatment that EY itself later overturned following the media exposure in 2021.   

Any public interest report by EY or recommendation on City Deal accounting and CCC’s failure to implement the £218m worth of prior year adjustments would inevitably shine a light on EY and BDO signing off statements of accounts which contained material misstatements.   

These considerations I believe go a long way towards explaining Mr Hodgson’s stated ambivalence over the need for prior period adjustments in his response to the A&A Chairman at the September 2022 meeting of the A&A Committee (see Section 11 above).

I sought legal advice on EY’s decision notices from a leading public law barrister, and was advised that they contained four points which in the KC’s opinion were contrary to law.  He recommended applying for a judicial review in which he would represent me.   

Regrettably, it has not been humanly possible to bring a judicial review, only because every one of scores of recommended public law solicitors I contacted to secure funding claimed they lacked capacity to take on the work.

In EY’s decision notice and statement of reasons document, and subsequently in a letter from EY’s solicitors, both were at pains to warn me against sharing the contents with anyone other than my legal representative.

Schedule 11 of the Act refers to “information relating to a particular body or person that is obtained by a local auditor…in the course of an audit under this Act.” 

In Appendix 5 below I have nonetheless included paragraphs 2.10 to 2.15 from EY’s 3^rd March decision notice and statement of reasons for two reasons:

1)  I do not believe those paragraphs contain information relating to a particular body or person under Schedule 11, but rather the auditor’s opinions,

2)  In the particular circumstances of EY’s cursory and retrospective “investigation” into City Deal accounting treatment and the inconsistency with which the auditor has treated the respective accounting treatments of City Deal 1 and City Deal 2 grant arrangements, I believe there is a compelling public interest in showing the external auditor’s evasiveness and lack of substance in his answer to legitimate questions about CCC’s absence of prior year adjustments to correct the erroneous City Deal 1 accounting treatment. 

To begin with, in Appendix 5, paragraph 2.10, Mr Hodgson asserted that addressing the question of prior period adjustments fell outside the scope of my 2021 objection because I did not mention it specifically.  I maintain that addressing prior period adjustments was implicitly included in the objection because of the imperative under IAS 8, paragraph 42 (see Section 11 above) for entities to correct material prior period errors retrospectively “in the first set of financial statements authorised for issue after their discovery”.

Secondly, the auditor’s paragraph 2.12 is evasive and incoherent.  In particular, the auditor does not explain why CCC has been inconsistent by correcting the accounting error in the first City Deal 2 grant, but not correcting the same error in the five, earlier City Deal 1 grants.  The mention of “subjectivity” and “the motivation of management” without explaining what they are do nothing to clarify why City Deals 1 and 2 grants should now be accounted for differently.  EY’s document still does nothing to answer the key question of why CCC and EY consider £218m worth of acknowledged accounting errors to be “not material to the users of the accounts”.  EY’s document is not a statement of reasons but a complete fudge.