UK watchdog cracks down on audit firms

The UK accounting watchdog is ramping up misconduct fines after being called useless and toothless by lawmakers irate at the failure of the accounting industry to prevent several high-profile corporate collapses.

Over two days last week, the Financial Review Council (FRC) levied penalties totalling £14.5 million (R263 million), almost equal to the total fines that the regulator issued in all of 2017.

It also issued an unprecedented warning that KPMG’s audit work is of an unacceptable standard and the firm will face increased scrutiny.

There is open speculation in the UK parliament about breaking up the big-four audit firms to increase competition and improve standards.

On June 12, the FRC fined PricewaterhouseCoopers a record £10 million for its 2014 audits of collapsed department store BHS Group and the Taveta Group.

A day earlier it fined KPMG £4.5 million for its 2013 audits of technology company Quindell.

The fines paid by the companies were discounted to £6.5 million and £3.15 million, respectively, for settling at an early stage.

The regulator further said that auditors at KPMG don’t challenge management enough, aren’t sufficiently sceptical and are inconsistent in their execution of audits.

To address the poor performance, the FRC will increase the number of KPMG audits it inspects in the current financial year by 25%.

The regulator is facing an independent review into its effectiveness after auditors it oversaw signed off the accounts of high-profile companies, including BHS and builder Carillion, that later collapsed, leading to thousands of job losses.

In addition, a report by a former appeals court judge last year said the watchdog should levy higher fines and make greater use of non-financial penalties.

The beefed up fines – the PricewaterhouseCoopers levy set a record – aren’t enough for lawmakers.

Frank Field, a Labour Party member of parliament, is already calling for the Pricewaterhouse Coopers’ fine to be increased, saying the regulator gave no explanation for the size of the penalty. – Bloomberg