FRC: Big Four face fines of up to £10m for poor audit work

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Big Four accounting firms will face fines of up to £10m as the Financial Reporting Council (FRC) seeks to crack down following a slew of mistakes and misdemeanours from the UK’s top practices.

From 1 June 2018, a potential £10m fine can be imposed for “seriously poor audit work” by Deloitte, PwC, KPMG or EY.

Although there is currently no top limit on the level of fines the FRC can levy, the £10m limit is part of a larger package of sanctions from the accountancy watchdog.

In a statement accompanying the news, the FRC said that fines will be discounted in line with the level of cooperation during an investigation to encourage early settlement.

The updated sanctions guidance is being implemented on the recommendations of a review undertaken in 2017. Recommendations made by the review and endorsed by the FRC include:

  • An increase in fines to £10m or more for seriously poor audit work by a Big Four firm
  • Exclusion from the accounting profession for a minimum of 10 years for dishonesty
  • Greater use of non-financial penalties
  • A waiver or repayment of client fees

The new guidelines also note that financial and non-financial sanctions can be “imposed in combination”, in line with the recommendations of the panel that the FRC aligns with US counterpart the PCAOB.

The record fine dished out by the FRC currently stands at £5.1m, given to PwC last August for its audit of RSM Tenon in 2011. However, this figure is dwarfed by the highest fine internationally, which currently stands at approximately £14m imposed by the Financial Services Agency of Japan on EY for its audit of Toshiba in 2012/13.

A string of high-profile scandals

The increased sanctions come at a time when both the FRC and the Big Four have attracted increased levels of public and parliamentary scrutiny following a string of high-profile scandals and company failures.

The collapse of contractor Carillion raised fundamental questions over the role of the audit for blue-chip companies, and the Big Four garnered criticism from MPs in a recent select committee hearing.

The FRC’s reaction to the Carillion failure was labelled as “useless” by parliamentarians in the same series of hearings, prompting CEO Stephen Haddrill to defend the organisation, stating that it was “unable to do more as it had been refused new enforcement powers”. The FRC has since launched its own investigation into the auditing of Carillion.

The regulator has also asked the Competition and Markets Authority (CMA) to investigate the Big Four’s dominance of FTSE350 company audits.

Fines won’t scare the Big Four

Commenting on the news, Bournemouth University professor in accounting Stella Fearnley told AccountingWEB she did not think increased fines will scare the Big Four.

“The more interesting question is what will FRC do with the money?” said Fearnley. “They could hand it over to the government and suggest that they use it to disband FRC's failed regulatory system, including themselves, and set up a Companies Commission which has real teeth legally to hold properly to account those who mislead the public with false accounting numbers.

“Furthermore a Companies Commission should also be charged with protecting the interests of our SME sector and smaller firms who have had accounting and auditing rules dumped on them by FRC which is burdensome and costly and of no benefit to the sector.

“A final improvement as Brexit is moving forward would be for government, under the aegis of the Companies Commission, to rewrite the 1986 Companies Act that will bring in stronger laws against dishonesty incompetence and fraud and rethink the effectiveness of IFRS which can be done post-Brexit  and give our citizens a legal system which will work for us.”

Marketplace harm

While it may come as no surprise that the Big Four oppose the FRC’s plans, when the recommendations were released last year Duncan Wiggetts, the ICAEW’s executive director for professional standards told its in-house publication that raising the bar too high could end up harming the audit marketplace.

“The urge to exact either noteworthy or material retribution will lead to fines so large they could potentially harm the economic functioning of the marketplace,” said Wiggetts.

“Fines that are too demanding substantially change the risk profile of an accounting firm, and the insurability of its trading. This raises the possibility of a larger audit firm choosing to exit what is already a narrow market rather if the risk becomes too high.”

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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11th Apr 2018 09:58

Unfortunately, this is what happens when you get over worked and under qualified university graduates.

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By DJKL
to tearforfears
11th Apr 2018 10:36

Surely the problems were more in the planning and less in the execution, the faults must lie further up the organisations (

I would for a start more look at those who share the profits and have a motive for quick/limited testing and saving time (and hence cost) in evaluating the risks at the planning stage?

Still, I can think of a good use for the money from the fines, set up a department that clamps down on small company Phoenix activities where all funds syphoned out and companies then struck off. (Missing director loans syndrome)

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By ShayaG
to DJKL
11th Apr 2018 16:07

I cannot think of a single significant audit failure where the audit *partner* was unaware of the material issues and nevertheless made himself willfully blind to them. For example, Tescos, Enron, banks during the financial crisis.

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11th Apr 2018 09:59

I wish they would have a look at the last audit of Conviviality (LSE: CVR) which fooled everyone including the Telegraph's Questor column, Investors Chronicle, and the company's own directors.

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11th Apr 2018 11:19

The audit has become a tick box exercise to ensure you satisfy the monitoring unit. Also the reliance on planning fails to recognise the need to look at the results of tests and question what else needs to be done. The Law Society and Land Registry commenting on fraud and money laundering are not a tick box exercise but you need to look at it the round. There is a need to question and use common sense and not rely on a rigid process plus the need for experience.

The process needs to be reformed and simplified.

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By ralan
to Anthony G Thorne
11th Apr 2018 11:28

Unfortunately Common Sense went out of the window a long time ago, as is said the fines will not worry the big 4 as they will merely increase their prices and their clients will continue to pay up because they are the "BIG 4" and their name is on the Report.

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By ShayaG
to Anthony G Thorne
11th Apr 2018 16:11

The fundamental problem is that audit partners are heavily financially disincentivised from qualifying.And that has been a problem since audit began.

But yes, I agree that imposing additional tick boxes is a tokenistic gesture applied as successive sticking plasters onto each fresh failure, when the underlying model is wholly broken.

You cannot buy independence.

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11th Apr 2018 11:33

Not the first and certainly not the last time that Big is not Beautiful.

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11th Apr 2018 12:13

firmly believe that no company should be able to use the same audit company for more than 2 years running and then not for the next x years, surely that would remove the complacency and familiarity between the two

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By ShayaG
to alan.falcondale
11th Apr 2018 16:12

That is a really, really clever idea. You remove the financial disincentives from qualifying.

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11th Apr 2018 12:51

When you do a 5 why on this you get to (or I do) that accountancy training (for those in industry) and more importantly cpd, is to blame. If auditors were just auditors we wouldn't have this problem , it's because big 5 and others are salesmen , overcharging for stuff employed accountants within the business should already be competent to do.

So Big 5 are then motivated to give the board leeway in order to not upset the cart for their other super profitable activities.

This situation in industry is analogous to employed hospital consultants , hiring in medical doctors when asked to do anything more than take a pulse.

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11th Apr 2018 16:50

Anyone tell me what the audit is for? So much conflict of interest that means we're never really surprised when a company goes bust even when the audited statutory accounts show a wonderful picture.

Nothing more than a worthless, expensive box ticking exercise!!

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By DJKL
to rememberscarborough
12th Apr 2018 15:56

I always thought it was to torment students in exams answering questions involving mealy mouthed platitudes about the role of auditors etc and having very little practical auditing (as actually performed) within the questions/ syllabus.

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19th Apr 2018 14:14

This article and many of the responses focus on the role of the Big 4 and their Client, mistaking the Board as the Client. The Auditor is engaged by the members and it is therefore that opinion that counts.
Until Shareholders become more active in the selection of Auditor, which may never happen, we add Carrillion to the list of "Accounting Scandals" and anticipate an increase in Fees for additional compliance work.

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