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.”
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.”