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Audit firms on alert over Vodafone 'conflict'

Vodafone has alerted the world's biggest accountancy firms that it may be forced to tender its multimillion pound audit contract because of the 2014 collapse of Phones 4U.

Sky News has learnt that the FTSE-100 mobile phone giant has told Deloitte, EY and K‎PMG in the last few weeks that it may ditch PricewaterhouseCoopers (PwC) amid the threat of litigation over the retailer's demise.

A source close to Vodafone said it had had asked three of the "big four" auditors to free themselves from potential conflicts that would prevent them pitching for the role sometime next year.

One insider emphasised this weekend that the company had made no decision to remove PwC but was taking the necessary preparatory steps in case it found itself forced to switch auditor.

The problem has arisen because of PwC's dual role as auditor to Vodafone and administrator to the British mobile phone retailer Phones 4U.

In the latter role, PwC has been drawing up plans to sue Vodafone and other mobile phone operators over their decision to stop supplying Phones 4U prior to its collapse.

The chain crashed into administration with the loss of thousands of jobs, sparking allegations that Vodafone, O2 and EE - now owned by BT Group (Other OTC: BTGOF - news) - had colluded to pull their contracts from the retailer.

A number of hedge funds‎ are said to have been buying Phones 4U's debt recently in the hope that they can profit from any successful litigation against the mobile phone networks.

Sources said it would be "very difficult" for PwC to continue as Vodafone's auditor if it was simultaneously pursuing legal action against its client.

The issue was scrutinised by investors around the time of Vodafone's annual meeting in July this year.

Institutional Shareholder Services (ISS (LSE: 0QRS.L - news) ), which advises fund managers on how to cast their votes at AGMs, ‎said in a report at the time that the situation "raises obvious concerns around conflicts of interest and auditor independence".

It added, however: "To its credit, the [Vodafone] audit committee has been proactive in addressing the issue head-on, consulting both with regulators and major shareholders when the issue came to light."

The mobile phone group came under pressure at the AGM from Standard Life Investments, which voted against PwC's reappointment as auditor.

Vodafone insisted at the time that it had no plans to replace PwC, to which it paid €16m last year for audit services and a further €4m of non-audit fees.

It said in this year's annual report that it had taken robust steps to ensure PwC's independence, including insisting on the physical separation between the audit team responsible for overseeing the company's accounts and the Phones 4U administration team.

Confidential material was being stored separately, with highly restricted access, it added at the time.

Sources said it was unlikely that Vodafone would make a proactive decision to tender its audit contract for months, if at all.

Strict audit rules meant, however, that encouraging PwC's rivals to "get clean" by handing over work on contracts that cannot be performed by a company's auditor was "a sensible step", according to one insider.

BT Group went through a similar process earlier this year in the wake of an accounting fraud at its Italian Global Services operations‎, subsequently replacing PwC with KPMG.

Losing the Vodafone audit role would be another bitter blow to PwC, which has only held the contract since 2014, when it replaced Deloitte.

The world's biggest auditor has been enduring a torrid time after a string of audit crises at other major clients.

PwC was informed by the Financial Reporting Council (FRC) this year that it was launching an inquiry into its BT audit.

It has also faced an investigation into its auditing of Tesco (Swiss: TSCO.SW - news) - although the FRC ended its probe in June after concluding that there was no realistic prospect of a tribunal finding it guilty of misconduct.

The FRC has also said that PwC's dual role with Vodafone and as Phones 4U's administrator does not breach its ethical standards.

PwC has also been fined multimillion pound sums for mishandling ‎the audits of Cattles, a financial services group, and Connaught, a social housing maintenance firm which collapsed in 2010‎.

Vodafone and PwC declined to comment.