Farepak auditor fined more than £1m

The Financial Reporting Council (FRC) has ordered Ernst & Young to pay more than £1m in fines and costs over its audit of failed Christmas savings company Farepak.

EY was fined £750,000 and told it had to pay costs of £425,000, while auditor Alan Flitcroft, who worked for EY and was responsible for signing off the audit, was fined £50,000.

Both the firm and Flitcroft were also formally...

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Comments

Why such a small fine ...

JC | | Permalink

'.. Swindon-based Farepak collapsed into administration seven years ago leaving 114,000 people with total losses of £37m ..'

Surely by anyones reckoning losses of £37m should attract fines of at least an equivalent amount - if not a multiple of the losses ranging between 2-10 times the losses incurred
 

Because the £37m losses    2 thanks

arcon5 | | Permalink

Because the £37m losses probably wasn't consequential to the failings of the auditors.

No problem but ...

JC | | Permalink

seem unable to find where in the FRC decision making process the consequential loss is identified so that any resultant fine could be based on this assessment

After all if one doesn't define the consequential loss then any resulting fine can only be an arbitrary value judgement, with no basis on fact or reality

Where does the fine go?

the_Poacher | | Permalink

Clearly the money isn't going to be distributed to creditors of Farepak as this would be an administrative nightmare but it would be nice to see it going to a good cause.

How about a homeless charity, food bank or a soup kitchen?

unFarepakage    2 thanks

mikenorthampton | | Permalink

 

To take money from relatively poor individuals saving their money for christmas strikes me as both cynical and negligent. (un)Farepak entered into a quasi-banking relationship with these savers/depositors (note the words). The savings should have been clearly identified as what they were - savings for christmas. The auditors must have known the nature of the transaction and failed in their obligations to both the savers and the company. not that the directors were any better.

If the savings had been treated as other people's money (Deposits?) rather than as creditors then the company's problems would have become apparant rather sooner.

I was mildly surprised the Bank of England kept so quiet....

 

This is a Fine not Compensation

bowpeople | | Permalink

The fine of £1.0m is paid to the Disciplinary body and not to the creditors

 

 

Farepak

HUGH W DUNLOP | | Permalink

This is not the first of its ilk to fail. Why are people still using them? Do they never learn. I realise that for many it is possibly the only way to save for Christmas, but at what risk. Money in a bank account though with little or no interest is infinitely safer.

However, as both parties have admitted their audit of Farepak and parent company European Home Retail (EHR) fell below the expected standard, is there not still cause for action by the creditors?.

Coach and horses    1 thanks

moneymanager | | Permalink

At the time I remember thinking that they were behaving as a deposit taker irrespective of what the firm called it. It was disgraceful that the acivity was not regulated as a bank.

Did

The Black Knight | | Permalink

Did the auditors owe the customers any duty of care at all?

The T.V. is still full of adverts to make best use of the low intelligence levels of the poor, but whose fault is it anyway.

You do wonder what actually happens on these audits though.

 

carnmores's picture

@money manager    2 thanks

carnmores | | Permalink

i disagree,  doesnt anybody who asks for money up front before delivering ie accountants fall into the same category, how would you differentiate Farepak from others , of course the audirors are to blame and the JDC should give the money to the creditors as cost were awarded as well. its teh same old story sending juniors out on a job and charging them out at over £100ph  these firms lack soul 

Blame

The Black Knight | | Permalink

They are not to blame for the collapse of Farepack are they?

They may have done a shoddy audit job which if done properly may have stopped the show earlier but only if the Sun or Daily Mirror had reported it or facebook had noticed that the report was qualified.

I can't see anyone that invested in a christmas scheme being intelligent enough to read financial statements can you. They are probably all into Wonga as we speak, despite the warnings on the adverts.

I think it is a bit too much to blame accountants for all of the worlds ill's.

This is surely a case of what we used to call the expectation gap.

 

on the other hand

The Black Knight | | Permalink

http://www.accountancyage.com/aa/news/2320116/farepak-auditor-ey-reaches...

 

The director seems to have got off rather lightly. Not even disqualified as a director?

As we frequently see the failure to spot the wrongdoing is of more importance than the wrongdoer themselves.

I do wonder who benefits from this confusion.

I wonder what the Insolvency Service did with BDO's report on the conduct of the directors that must have been reported if the accounts did not show a true and fair view.

 

Auditing    1 thanks

The Black Knight | | Permalink

Norman DuSoleil wrote:

LESS unwitting punters would have lost their money if E&Y has responsibly grasped the nettle early on, and resigned as Auditors while clearly saying why.

I don't think it would have made much difference.

Today's audit is about filling in a file for the inspector's. Your secondary role is to take the blame when something goes wrong.

It is very easy to be blamed for something everyone sees as obvious after it is pointed out, but no one spotted at the time.

Independence (as should be) cannot ever exist when the fee is negotiated. Unless the JMU take a stricter line, but there is a culture of telling fibs (and removing smoking guns from the file) so I do wonder if they would ever get to the truth.

Can you imagine being the manager on a job like that and coming back to tell the partner the accounts were wrong and he was going to loose the client and the fee. I think you would have been told to "go and consider your career and come back with a can do attitude and a slimmer file"

This was also a subsidiary of a much larger job.

I'm afraid at all levels many accountants do not have the balls to follow their professional guidelines. It is very often an unpleasant experience to hold the line especially when the majority do not. Part of the problem is as an employee you have no protection or support if you do what should be done and resign, tied by confidentiality clauses and not entitled to benefits because you can't say why you left your last job. Added to which the system does not really take such matters seriously, criminal prosecutions are avoided wherever possible and the fines are a fraction of the fee.

As a partner the pressure comes from the director taking the fee to "a firm that will" and there are plenty out there. Often firms that don't do the job properly are half the price too.

We have a culture problem in that the "being seen to be doing" is more important than "the doing" to such an extent that the doing does not need to be done. This pervades all levels of commerce and society.

The fix is that the honorable need supporting by a few hangings NOT fines and slaps on the wrists. Is it perhaps the legislation is so draconian that it can never be used? I think MP's ought to be asked why their legislation is so ineffectual. It's as if the Companies Act is not policed at all. Certainly there is no government body that claims responsibility for it.

At the very least the JMU should expand their sample size (an audit technique when you find an error for JMU readers) and perhaps take away Ernst and Young's Audit licence UNLESS it was an Isolated incident in usually high standards. Be an accountant with big balls to do that, at the ICAEW? I think not then!

And your point is?

moneymanager | | Permalink

Sorry Carnmores I don't think I understand.

Is it that you disagee that the operationsof this business fell outside of regualated business and that you disagree with my assersion that it should?

Would not regualtion have mandated at the very least the operation of a trust account for 'client monies'?

The FSA/FCA numpties have moved progresively toward and to far to removing caveat emptor but a regualted environment (ugh) would have, should have, prevented some of the factors leading to customer financial loss and at the very least would have provided access to the FSCS.

As we are where we are, I don't disagree any of your points particulalry relating to the FFRC passing the money over.

In passing I read that the former chairman of EHR was Sir Clive Thompson, yes former Deputy Chairman of the Financial Reporting Council. Might explain the slapped wrist.

Expectations gap

The Black Knight | | Permalink

Never has the expectations gap been wider.

What is a statutory audit supposed to do? Protect the shareholders? Support the Companies Act? To make sure there is some regulation in accounts presentation and disclosure?

Did it do that, Yes!

It's not really there for consumer protection or fraud detection.

I think the question needs to be answered from a point of view of what would happen if there was no statutory audit and in this sense an Audit is more powerful because of the expectations gap.

The fear of an audit (misunderstood) is perhaps more powerful or useful than the audit itself.

Why has a poor audit been focused on when the questions should have been:

1, Did the director or should the director have had concerns regarding going concern and was this reviewed by the auditors?

2, Were there any breaches of laws and regulations that might have had an effect on going concern.

3, Did the director disclose these? Obviously not.

4, Why has the liquidator/the insolvency service via the courts not asked for a personal contribution from the director to pay the creditors.

We are all schooled in the terrifying consequences of making a mistake according to the law but in practice this is just scaremongering as it never happens.

Was wrongful or fraudulent trading even considered?

However speaking with IP's many of their reports to the insolvency service and recommendations for disqualification are simply dismissed as not in the public interest.

Seems to be

The Black Knight | | Permalink

Seems to be the way of the world!

Comes down to, No enforcement/remedy = a fraudsters/charlatans paradise.

carnmores's picture

@moneymanger

carnmores | | Permalink

if i remember correctly and am sure someone will correct me , much of the fault was due to cros collateralisation by the banks; the bank should have known that the customers monies did not belong to  the company and the company should not have pledged it. furthermore the auditor seems to have missed it or deemeed it not worthy of note. this is why the auditors responsibilities are still primarily to the sheholders and not others , this should change .

slipknot08's picture

poor sociopath...

slipknot08 | | Permalink

Norman DuSoleil wrote:

[...] and sociopaths that do not give a toss about what anybody thinks about them anyway?

 

Hey, don't knock us sociopaths: I qualify by your definition, but I'm EXTREMELY moral (especially in my professional dealings): I hold myself to the high standards of my Institute and my profession - I just don't care what anyone else thinks of me

3-)

word

The Black Knight | | Permalink

Word u believe it that word is not in my concise oxford dictionary.

I was trying to understand the difference between that and a psychopath (frontal empathy lobes not working)

 

slipknot08's picture

Thank you

slipknot08 | | Permalink

Yes, I do (think positively of you). It is very difficult to not be part of the accepted norm in life - you find yourself having to struggle twice as hard sometimes just to keep up with those who sometimes take easier routes. BUT it is worth it, to be the intelligent, decent, individual you obviously are (not so much with me - intelligent, probably yes, decent - probably no, but I do love animals unreservedly so I have at least one redeeming feature!).