Is another stock market crash around the corner?

Auditors are poised to raise the red flag over their clients’ accounts having been criticised for not being tough enough – and it’s making regulators very nervous, writes James Moore

Auditors have repeatedly been cast as the villains for failing to raise the alarm over companies like Carillion (EPA)

Is a fresh bout of bloodletting on the stock market just around the corner? Having been harshly, and justifiably, criticised for turning a blind eye to problems bubbling under the surface of some very big corporate names (Thomas Cook, Carillion, Patisserie Valerie, etc) it seems auditors are finally of a mind to get tough.

This means a large number of companies could end up with question marks applied to their accounts when they are published over the coming weeks and months. Think retailers classed as “non-essential” during the lockdown or those in the leisure and hospitality sectors.

Auditors could almost be justified in attaching a red warning light to any consumer-facing company.

Regulators are understandably concerned about this prompting a fresh bout of instability, even another crash, at the worst possible time.

What if potentially viable companies were to trip up by dint of their auditors refusing to sign off their accounts without qualification? What if they were to raise issues about businesses’ status as “going concerns”?

This is no dry debate. It could have real world consequences. Breaches of banking covenants, insurers and/or suppliers bolting or imposing punitive terms, customers taking fright.

Troubles, they say, come in threes. Any one of those would be enough to call into question a company’s ability to navigate a path through the current crisis.

It wasn’t an issue during the last bout of turmoil. I am, of course, talking of the financial crisis, when arguably it should have been.

A case in point: HBoS was an institution signed off as a going concern just months before several flocks of pigeons came home to roost and suddenly it wasn’t. A hasty rescue by Lloyds, which then required £25bn of taxpayer-funded support, was the result.

“You don’t understand our job,” the auditors said after each subsequent scandal (and there were quite a few). Oh yes we do, and you’re not doing it, said critics, including myself.

Audit had become something of a joke, an exercise used by accountants to get a foot in the door so as to sell on more lucrative consulting services.

But in the light of recent events, were we wrong to criticise so harshly? In a word, no. Even if it prompts a crash? It doesn’t need to.

Investors should already be well aware of which companies in which sectors are at risk. They’ll have known even before those companies began issuing trading statements saying yes, we’re in a bind, we’ve this much debt on our books, and we’re burning through cash at a frightening rate.

Frankly, if an auditor were not to raise a question mark about the accounts of a company whose business has been shuttered for weeks on end, then its shareholders might very well ask what it had been doing to earn its fees.

It’s the unexpected that tends to cause panic. Most of the red lights that will be applied over the coming months won’t be that at all.

The wording could be important, and this is something the regulators who’ve been discussing the issue with a degree of urgency, could address in conjunction with the industry.

The use of the word “Covid-19” and a reference to the uncertainty it’s causing ought to do the trick.

That’s not to say there won’t be some wobbly share prices, and nervousness among connected parties when they hear the sirens.

But a rash of them sounding off needn’t be deadly if the City’s denizens behave like grown-ups. That’d be the trick, of course, particularly these days, and all the more so given the character of the the government in Westminster. But we are rather overdue a surprise on the upside.