Audit failure in the UK energy supply industry

Between January 2021 and February 2022 thirty-one energy firms exited the energy market, affecting more than two million consumers The Office of Gas and Electricity Markets (Ofgem) estimated the cost of energy supplier failure and market exits to be £2.7 billion, or an average of £94 per customer. One cause of failure was Ofgem’s decision to relax market entry standards, leading to the emergence of a large number of thinly capitalised and often unhedged suppliers who were unable to withstand the increases in wholesale prices in 2021. However a less well understood cause was the enrollment of unwitting company auditors into the central macroeconomic oversight processes of the sector: as Ofgem relaxed entry standards, they increasingly deferred to energy companies’ audit reports as a proxy indicator of their financial resilience. This report argues that whilst director statements and audit reports are no substitute for proper sectoral oversight and governance, auditors should still have been able to identify and articulate the economic vulnerability of these companies. There was, in other words, widespread audit failure. To reinforce this, we present an accounting analysis of 15 energy suppliers who exited the market.