UK regulator gets tough
Council imposes harsher fines and warns KPMG it is not up to scratch
The UK accounting watchdog is ramping up misconduct fines after being called useless and toothless by legislators irate at the failure of the accounting industry to prevent high-profile corporate collapses.
The UK accounting watchdog is ramping up misconduct fines after being called useless and toothless by MPs irate at the failure of the accounting industry to prevent high-profile corporate collapses.
Over two days last week, the Financial Review Council (FRC) levied penalties totalling £14.5m, almost equal to the total fines that the regulator issued in all of 2017. And late on Monday it issued an unprecedented warning that KPMG’s audit work is of an unacceptable standard and the company will face increased scrutiny.
The regulator’s renewed vigour comes as MPs repeatedly complain that lax accounting has contributed to some of Britain’s biggest corporate scandals. In addition to anger at the regulator, which faces an independent review of its effectiveness, there is open speculation in parliament about breaking up the big four audit firms to increase competition and improve standards.
On June 12, the FRC fined PwC a record £10m for its 2014 audits of collapsed department store BHS Group and the Taveta Group. A day earlier it fined KPMG £4.5m for its 2013 audits of technology company Quindell. The fines paid by the companies were discounted to £6.5m and £3.15m, respectively, for settling at an early stage.
On Monday, the regulator said that auditors at KPMG do not challenge management enough, are not sufficiently sceptical and are inconsistent in their execution of audits. To tackle the poor performance, the FRC will increase the number of KPMG audits it inspects in the current financial year by 25%.
KPMG said in a statement that it is “disappointed” with the results and is working to improve its standards.
“We cannot and will not be satisfied with these results and, as a firm, we are already working to put this right,” said Michelle Hinchliffe, the head of audit at KPMG.
POOR PERFORMANCE
A week ago, the accounting firm said it regretted that some aspects of its Quindell audit “did not meet required standards”.
The regulator is facing an independent review into its effectiveness after auditors it oversaw signed off the accounts of high-profile companies that later collapsed, leading to thousands of job losses. Among these were BHS and builder Carillion.
In addition, a report by a former appeals court judge in 2017 said the watchdog should levy higher fines and make greater use of nonfinancial penalties.
A UK parliamentary committee report in May said that the accounting watchdog and the pensions regulator were “united in their feebleness and timidity” on Carillion’s accounts and that the FRC “identified concerns in the Carillion accounts in 2015 but failed to follow them up”.
Atul Shah, professor of accounting and finance at the University of Suffolk, said that the FRC’s record has been “appalling” because it has only reacted after corporate collapses rather than preventing them. “Most of the damage has been done,” he said. “Fines are being seen as a cost of business.”
The beefed-up fines — the PwC levy set a record — are not enough for MPs.
SEVERELY REPRIMANDED
Frank Field, a Labour Party MP, is already calling for the PwC fine to be increased, saying the regulator gave no explanation for the size of the penalty.
PwC partner Steve Denison was also fined £500,000 for the BHS and Taveta audits, severely reprimanded and ordered not to perform any audit work for a period of 15 years.
A representative of the regulator said: “We have increased the number of staff in our enforcement division in recent years in order to process cases quicker and to undertake the volume of cases we take on.”
The accounting industry itself has come in for its own criticism. MPs have called for a separate report by the FRC and the UK’s Competition and Markets Authority to consider whether the big four auditors — EY, PwC, Deloitte and KPMG — should be broken up to create more competition.
Michael Izza, CEO of the UK Institute of Chartered Accountants in England and Wales, said that the drive for higher fines is at odds with a push to break up the big four.
He argued that bigger penalties scare off smaller competitors, as “the risk in imposing ever-greater financial sanctions is that these increase the risk profile of auditing”.
Since changes were made in regulations of auditors in 2016, “there has been a significant drop in the number of accountancy firms being prepared to carry out public interest entity audit work and we believe the numbers will continue to fall sharply,” he said in an e-mailed response to questions.
This “runs contrary to the recent calls for greater competition.”