Case Study: Audit Committee Challenges in Tesco PLC and Carillion PLC

This case study examines the failures of audit committees in Tesco PLC and Carillion PLC, highlighting the lack of independence and scrutiny that led to financial reporting issues. The analysis delves into the reasons why the audit committees did not challenge executives, including undue influence from management and inadequate assessment of financial records. The document references the Companies Act 2006, emphasizing the importance of independent and skilled audit committee members. It also explores how the committees should scrutinize company decisions, including the application of proper audit procedures and third-party confirmations. The Carillion case reveals internal audit failings in financial controls and risk management. The study concludes by emphasizing the importance of audit committees in ensuring accurate financial reporting and internal control compliance, and how they should oversee financial reports and assess internal controls and risk. The document includes references to relevant academic literature and news articles to support its claims.

Corporate governance

TESCO PLC
The audit committee did not challenge the executives of the Tesco plc. due to following reasons:
In the given problem of Tesco Plc, it is stated that audit committee did not challenge the
executives of the company on the decision of overstatement of the profit because of lack of
independence and undue influence of management. Further, the assessment of books was not
done in independent manner as well as in deep due to which auditors were not able to ascertain
the significance of existing issues in books of accounts of Tesco Plc.
The committee must work independently in specified manner
In accordance with provisions specified in Companies Act 2006, the audit committee must work
in independent manner, so that the quality of work not impaired by their decision. The member
of the committee should be skilled, professional, and experienced, so that they can carry out their
work in an effective manner (Sultana, 2015). It is further stated by Sultana, (2015) that it can be
said that, member of the committee should maintain integrity and objectivity at the time of
performing work. They should not engage in any financial interest of the company, by which the
conflict of interest may arise.
The manner in which committee should scrutinize the decision of company
The principle function of the audit committee is to assure the compliance of financial reporting
process, internal control and compliance with required legal norms and regulations. Therefore
the committee should scrutinize the decision of the company by applying proper audit
procedures and taking evidence through third party confirmation (Ahmed Haji, &Anifowose,
2016). Even the existing system should be rectified in order to ascertain existing irregularities
which are being reported to Board for ascertaining appropriate solution

CARILLION PLC
The audit committee did not challenge the executives of the Carillion plc. due to following
reasons:
A similar issue relating to lack of scrutiny was assessed in Carillion plc in which last year the
auditor had been accountable for the ‘increasing fantastical figures’ of books of accounts of
Carillion in auditing. It is because, the internal auditor of the company was not able to identify
and disclose the ‘terminal failings’ in financial controls as well as risk management and ignored
them in significant extent (Jolly, 2018). Thus, auditors were held liable due to breach of their
statutory dutyof application of due diligence in case of Carillion plc.
The committee must work independently in specified manner
In accordance of provision of Company’s Act 2006 it is the duty of auditor to present the actual
picture of company to management as well as to shareholders (Ahmed Haji, &Anifowose, 2016).
However, as the auditor of Carillion plc was not able to present the actual picture of company’s
which can easily be determined through compliance of appropriate audit procedures.
The manner in which committee should scrutinize the decision of company
The audit committee should scrutinize the decision of the company through overseeing the
financial reports as well as assessing internal control and risk relating to same. The specified
procedure can be done in adequate manner by being familiar with the processes and control
management of the organization in order to analyze the extent of their effectiveness (Jolly,
2018).

REFERENCES
Ahmed Haji, A., &Anifowose, M. (2016). Audit committee and integrated reporting practice:
does internal assurance matter?. Managerial Auditing Journal, 31(8/9), 915-948.
Sultana, N. (2015). Audit committee characteristics and accounting conservatism. International
Journal of Auditing, 19(2), 88-102.
Jolly J. (2018). 'Decline in quality': auditors face scrutiny over string of scandals. Retreived
through <https://www.theguardian.com/business/2019/feb/01/decline-in-quality-auditors-
face-scrutiny-over-string-of-scandals>