When auditors overstay their welcome…

A cornerstone of audit is independence. A recent stumble by EY – one of the Big Four accounting firms – highlights that even some of the most prestigious names get don’t always get it right.

Shell, the energy giant, has been forced to file amended regulatory reports in the United States after it was informed by EY that its lead audit partner had breached Securities and Exchange Commission (SEC) rules. Under SEC and UK Financial Reporting Council (FRC) guidelines, audit partners are limited in how long they can serve as the lead auditor for a client, in order to preserve professional scepticism and independence.

In this case, Gary Donald, the EY partner overseeing Shell’s audits, exceeded the permitted tenure. As a result, Shell’s 2023 and 2024 financial reports—originally approved under his signature—are no longer considered compliant in the eyes of US regulators.

What Happened and Why It Matters
EY formally informed Shell that due to this breach of audit partner rotation rules, its US audit opinions for the last two years “should no longer be relied upon.” The firm assigned a new audit partner to review the reports, who found no material errors or misstatements in the financials. Still, Shell is now required to file amended versions of its Form 20-F with the SEC to address the procedural violation.

While no amendments are required under UK rules, there is a potential reputational fallout. For EY, which earned $66 million from Shell’s audit last year, this slip-up has triggered regulatory scrutiny, a potential seven-figure fine, and questions about the firm’s internal quality control.

For business students, this case offers important lessons about governance, independence, and strong internal monitoring systems.

Lessons in Auditor Independence
Audit partner rotation exists to prevent the development of overly cosy relationships between auditors and management. When an audit partner has been on a client’s account too long, there is a risk that their professional scepticism may erode, consciously or unconsciously. Regulatory bodies like the SEC and FRC have therefore instituted limits—typically five consecutive years—to maintain objectivity and avoid conflicts of interest.

EY’s oversight—allowing a partner to remain past the regulatory limit—is not just a paperwork issue. It undermines confidence in the audit process and invites scrutiny from shareholders, regulators, and the public. In an environment where trust is everything, this kind of breach is serious.

Repeat Offenders?
This is not the first time EY has faced scrutiny over independence rules. In April, the FRC fined EY £325,000 over a similar lapse in its audit of a Veolia subsidiary. The firm had claimed to have implemented tighter controls in response. It appears that those changes were either insufficient or poorly enforced.

The repeat nature of these violations could signal systemic weaknesses in EY’s compliance monitoring. For students, this highlights the importance of internal audit and compliance roles—not only in preventing misconduct but in safeguarding long-term reputation and client relationships.

Shell’s Role and Response
Shell is not accused of wrongdoing. The error lies with EY, but the fallout affects both parties. Shell must now republish its financial reports in the US, despite there being no changes to the actual figures. The incident also complicates Shell’s future audit plans—especially since the company has stated its intention to rehire EY for another ten-year term, pending shareholder approval.

Should Shell proceed with reappointing a firm that has failed to uphold such a fundamental regulation? That’s a governance question shareholders and board members must seriously weigh.

The Commercial Implications
Shell’s audit contract is one of the most lucrative in the UK market. For EY, losing it would be a financial and reputational blow. But this is not just about one contract—it’s about what this story signals to clients, regulators, and talent.

Firms operating at the highest levels of the profession are expected to uphold the highest standards. Compliance lapses—especially repeated ones—can quickly erode trust and jeopardise client retention.

What Business Students Should Take Away
Compliance is strategic – Regulatory procedures are not bureaucratic red tape; they protect stakeholders and uphold market integrity.

Independence matters – An auditor’s independence must not only be real but also perceived. Partner rotation is essential to that perception.

Internal systems must evolve – As firms grow and take on more complex clients, their internal controls must keep pace.

Reputation is fragile – One oversight can have wide-reaching implications, even if no fraud or misstatement occurred.

Ultimately, this story is about more than a partner overstaying their term—it’s a cautionary tale about the silent power of compliance, and the very loud consequences when it’s ignored.