Two accountancy firms have fallen foul of the ICAEW audit independence and ethics rules, according to this month's disciplinary report.
BDO and KJ Pittalis & Co were both reprimanded and fined under rules for breaching two different sets of rules for having a financial interest in the company their firms were auditing.
In BDO's case, tax partner John Wilmott held over 45,000 shares in an unnamed company his firm was auditing, contrary to ICAEW’s Ethical Standard 2.
The firm was reprimanded by the disciplinary and fined £5,470 and ordered to pay £4,462 in costs.
BDO holds a prohibited entities list that states partners aren’t permitted to hold a financial interest in a company being audited.
Staff are required to sign this annually, but in November 2008 the tax partner overlooked his financial interest in the company, which appointed BDO as auditor in October 2008, the ICAEW disciplinary committee found.
Wilmott's financial adviser bought the shares in April 2008 issued under the enterprise incentive scheme, which allowed him to claim tax relief if he held the shares for three years.
In 2009, he became aware of the potential conflict and asked BDO’s risk management unit for advice.
The firm's ethics partner advised him to dispose of the shares, but said he should be allowed to keep them until the end of the EIS qualifying period in May 2011. The ethics partner did not consider there was a threat to audit independence, as the tax partner had no involvement with the audit client and was based in London, while the audit team was in Manchester.
The ICAEW said however that Ethical Standard 2 is “unequivocal” and while it was unfortunate that Wilmott would have missed out on the EIS relief, the shares should have been sold straight away.
“The tribunal viewed the breach as very serious. BDO had come to an incorrect judgement on an extremely important aspect of the ethics which apply to the profession, that is, the need for independence in respect of audit clients,” the disciplinary committee concluded.
The Audit Inspection Unit uncovered the situation when reviewing BDO’s engagements between July and November and referred it to the ICAEW.
The north London firm KJ Pittalis & Co, was reprimanded and fined for the similar offence of issuing an audit report for a company in which a member of staff had a direct financial interest.
Principal John K Pittalis held shares in the company the firm audited between 1995 and 2009, amounting to 6.87% of the company’s shareholding. The remaining shareholders were all related to Pittalis and other family members were directors.
In 2010, the ICAEW received an anonymous tip-off about the company's accounts and another firm took over the audit.
The ICAEW disciplinary committee ruled that this was a breach of audit regulations, reprimanded the firm and fined it £7,000 with costs of £3,937.