Renold Accounts, Audit Quality and Abnormal Price Movements

Chain maker Renold (RNO) has provided the latest example of sloppy accounting work. On the 9th July it reported that it had identified accounting issues in the three years ending March 2017, 2018 and 2019. Assets and profits were overstated and liabilities were understated in the Torque Transmission division. In total adjusted operating profits were overstated by £1.8 million. As a result the AGM is being postponed to give time for revising the Annual Accounts. Their auditors are Deloitte.

The Financial Reporting Council (FRC) have reported on their latest assessment of audit quality and it makes for dismal reading. Their target for assessed audits is 90% being “good or requiring limited improvements” but only 75% of FTSE 350 audits met that target. Overall there has been no improvement on last year.

Grant Thornton and PwC came in for particular criticism. Scrutiny of Grant Thornton has been increased and PwC is required to take “prompt and targeted action” to address their decline in performance. KPMG also continues to be subject to increased FRC scrutiny. The FRC suggests that all audit firms suffer from failing to challenge management sufficiently on judgmental issues, and need to work harder to solve this problem.

Comment: this has certainly been a long-standing issue that is driven by the desire of audit firms to reduce their prices to win business and reluctance to challenge management. Renewal of audit contracts with the same firm over many years contributes to the problem. The only way to break this system is to change how auditors are hired. At least that’s my personal opinion.

But the good news for investors is that the Financial Conduct Authority (FCA) have reported that abnormal price movements before deals are announced were down last year. In other words, market abuse has fallen by 12% and is now at its lowest level since 2006.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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