Sports Direct: Why a failure to find an auditor might be the best outcome for independent shareholders

Buckle up for the Sports Direct AGM.

While these affairs aren’t usually terribly exciting, when they blow up, they blow up big. This one has has that potential.

Mike Ashley’s retail empire has a problem. With auditor Grant Thornton having quit, the company needs a replacement. It hasn’t been able to find one.

One of the big four (PwC, EY, Deloitte, KPMG) would be the preferred candidate because of the expertise they have dealing with big and complex organisations.

Trouble is they’ve been fighting shy of the tender.

MPs, regulators, and the press have been putting them under the microscope and asking uncomfortable questions in the wake of several messy scandals, such why didn’t your audit team raise the alarm bells when half the City knew (insert name) was screwed.

Ashley has been a magnet for controversy ever since Sports Direct landed on the London Stock Exchange.

As a result, his company appears to have been filed under the heading “reputational risk”.

Now, if the company doesn't pull a rabbit out of the hat, it will have a week to write to Business Secretary Andrea Leadsom, who’ll get landed with the job of making an appointment.

This is really too precious. If you want to find a less sympathetic character than Ashley, Leadsom is it.

Say what you want about the Sports Direct boss, but he’s never been complicit in the deliberate suspension of democracy through proroguing Parliament after having publicly stated opposition to such an outragesou move. That's not true of the Secretary of State for Business, Energy & Industrial Strategy (BEIS).

If this does get to her desk, it will hand Boris Johnson’s government yet another painful headache, one of those famous “events, dear boy” that Harold Macmillan, a much less obnoxious Conservative leader of a much less obnoxious Conservative Government, once opined upon.

Perversely, however, this is one that could ultimately work out well for Sports Direct’s beleaguered band of independent shareholders, who are in a minority at the company thanks to Ashley’s controlling stake.

Here’s how it might go: All of the Big Four do work for the government, some of it quite lucrative. BEIS therefore has some leverage that could be used to lean upon one of them to take on the job, with the obvious implication that it will be made worth the (un)lucky winning candidate’s while in future.

Auditors are usually appointed and paid for by the companies they audit. This obviously creates a potential conflict of interest.

But in Sports Direct’s case, the auditor will have been appointed by the government and with all eyes on the poor schmos handed the responsibility, they clearly be motivated to do an unusually thorough job.

Kicking up a fuss won’t hurt them with other potential clients because they’ll be well aware of the background.

They’ll therefore have an unusual amount of cover to go in hard. Sports Direct’s independent shareholders will be the winners from that. If that's how it goes, some bright spark might then suggest that all big company auditors should be appointed by an independent body. But that's one to file away for another day.

In the meantime, keep an eye on the number of votes against Ashley’s reappointment as CEO. He can’t be kicked out because of that controlling stake. But if a majority of independent shareholders vote against him it will be horribly embarrassing.