On November 15, 2016, BP announced that they will be changing their auditors to Deloitte. Ernst & Young was previously their auditor. 

There is a mandatory rotation for audit firms in the UK, but there is no clear indication that this is the reason the change was made. 

We’ve included the BP press release below. 

“BP p.l.c. today announced that it intends to propose to shareholders at its 2018 Annual General Meeting that Deloitte be appointed as the company’s auditor for the financial year 2018. This decision was taken following a competitive audit tender.

EY, BP’s current external auditor, will continue in its role and will undertake the audit of BP p.l.c. for the financial years 2016 and, subject to reappointment by shareholders at the next Annual General Meeting, 2017.

Brendan Nelson, Chairman of BP’s Audit Committee, said: “I would like to thank EY for their high professional standards and all they have done to provide assurance to the Board and shareholders during their time as BP’s auditors. Subject to shareholder approval at the 2018 AGM, we look forward to working with Deloitte.”

Notes to editors

In BP’s 2013 annual report, the BP Audit Committee announced its intention to launch a competitive audit tender process in 2016 to appoint a new external auditor effective from 2018.
Annual appointment of external auditors by AGM is required under UK law. UK and EU law now requires an auditor’s maximum period as auditor to a listed company to be 20 years, with a competitive tender process required at least once every 10 years. ”

— BP

The press release states that the decision was made following a competitive audit tender. What this means is that BP put the audit up for proposal to all big 4 accounting firms and Deloitte won. 

All things being equal, public companies don’t regularly change auditors. Especially in the case of very large public companies. The main reason they don’t is because of optics. It looks really bad to investors if you change auditors. 

On the surface, if you change auditors, it looks like you disagreed with them on something incorrect in the financial statements. Investors worry that there might be hidden risk in the financial statements that the auditor would not let through. 

In the UK and EU it is a requirement to change auditors every 20 years. There is also a requirement to have a competitive proposal process every 10 years. Supposedly this is why BP changed their auditors, but this could just be the sugar coating on something more serious. 

I don’t blame BP for changing auditors here. Ernst & Young has had a bad year of publicity. EY and their clients have been slammed by regulatory agencies over the past year.

  1. Ernst and Young settled with the SEC for not detecting fraud at Weatherford which was another oil company. 
  2. EY settled with the SEC over having close personal relationships with clients.

Using a regulatory requirement of changing auditors in the UK to make that transition is a smart move by BP.

I also think it is smart to change auditors every 10 years. It reduces the risk associated with an auditor getting comfortable with a client which is something EY has struggled with recently.

Auditors get comfortable taking the same approach to audits every year. They also get comfortable with consistent revenues. They will do anything to avoid tense relationships with an audit client. As of 2015 EY earned $51 million in revenues from BP. With revenues above $50 million every year, you just don’t push your client that hard. However, if you know that revenue is going to disappear in a couple of years, maybe you dig into more and perform a more independent audit. 

EY retained the audit for 2016 and 2017. They will transition to Deloitte in 2018. Let’s see if BP faces any additional scrutiny from EY as a result of this transition. 

Let’s take a look at the fees for EY over the past few years. This information was obtained from BP’s annual report.

Fees (in millions)201520142013
The annual audit of BP272726
The audit of BP subsidiaries131313
Total annual audit fees404039
Audit related services778
Total audit and audit related services474747
Tax compliance services111
Tax advisory services–11
Services related to corporate finance112
Total other non-audit services by EY121
Total non-audit services by EY355
Services for BP pension plans111
Total fees paid to EY515353

 

As you can see EY’s total fees went from $53 million in 2014 and 2013 to $51 in 2015. This shows that their might have been some fee pressure from BP in 2015. Fee pressure along with bad press from EY could have been factors that made BP change their mind. We will get a better picture of what made BP change their mind when the 2018 annual report is released. If Deloitte’s fees aren’t too different from EY’s, then we know that there were additional factors as to why BP changed auditors.