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hoarding cash | accountingweb | The ICAEW’s income from fines and cost recoveries
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ICAEW members’ fines should be put to public use

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The ICAEW needs to improve its governance and accounting, says Richard Murphy, and use the funds from members’ fines for the greater good.

1st Jun 2023
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The accounts of the Institute of Chartered Accountants in England and Wales (ICAEW) are addressed to its members and, as a member of more than 40 years standing, I take the time to read them.

This year, as I have done in earlier years, I noticed the extraordinary impact on these accounts of fines paid by members of the ICAEW to the Financial Reporting Council (FRC) as a result of their having undertaken deficient work at cost to society at large.

My previous correspondence with the ICAEW on this issue related to their use of these funds to apparently reduce the membership fees of ICAEW members by eliminating charges for membership of ICAEW faculties. I thought this an inappropriate gain for members to arise as a result of the failings of the profession as a whole, but my comments produced what I thought to be an unsatisfactory response. As a result, I decided to review these accounts in more depth.

Income from disciplinary actions

Having done so I appreciated the scale of the income the ICAEW has received since 2015 as a consequence of disciplinary actions against its members. Since 2004 these investigations have been largely managed for it by the FRC. They determine guilt and impose fines and order cost recoveries. At the same time, the ICAEW imposes a levy on its members to supposedly cover the costs incurred. In exchange for guaranteeing that the FRC will not be out of pocket on its activities, the ICAEW has the fines and cost recoveries paid by its members credited to it.

Before 2015 it is hard to determine precisely what the financial consequences of this activity were from the ICAEW accounts. I am told a loss of £21m was incurred from 2004 to 2014, but have not seen the workings despite requesting them. Since then they look like this.

icaew accounts
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The FRC Conduct Committee of the ICAEW has become a profit centre for the ICAEW since 2015, as have fines received. Income from these combined sources reached £29.8m in 2020. Reserves have grown dramatically. And nowhere is there any sign that the ICAEW has any plan to put these funds to public use, which is the obligation imposed on it by its Royal Charter. 

Strategic goals

In fact, the ICAEW’s current strategic goals, as detailed in its annual report and elsewhere, look to be modest in scale, and in likely cost, being to:

  • strengthen trust in ICAEW chartered accountants and the wider profession
  • help to achieve the Sustainable Development Goals (SDGs)
  • support the transformation of trade and the economy [after Covid]
  • master technology and data
  • strengthen the profession by attracting talent and building diversity.

None of these would in fact seem to be that strategic: they appear routinely and even rather mundanely operational in their nature, implying that they should be funded out of normal operating income.

Despite that, the ICAEW has assured me, Parliament and journalists that the funds from fines are being retained as a strategic reserve. This is not a term to be found in its accounts, however. The ICAEW explains this by saying that all its reserves are strategic and that funds from fines will not be used for operational purposes. 

That is an interesting proposition, but without guidance from International Financial Reporting Standards (IFRS), which does not even define reserves, or company law (since the ICAEW is an entity governed by Royal Charter), this requires some other guidance to be found. It would need to cover the appropriate disclosure to be made on this issue by a public interest entity (PIE) operated on a mutual basis on behalf of its members with a strong educational element to its work. The UK Charity statements of recommended practice (SORPs) provides this guidance and is very clear on accounting for reserves, strategic or otherwise: “The charity must explain any policy it has for holding reserves and state the amounts of those reserves and why they are held.”

The ICAEW does not do this. 

Nor does it follow the following guidance in that SORP, even though it would seem reasonable that it be required to do so.

  • Identify the amount of any funds that are restricted and not available for general purposes of the charity at the end of the reporting period.
  • Identify and explain any material amounts that have been designated or otherwise committed as at the end of the reporting period. 
  • Indicate the likely timing of the expenditure of any material amounts designated or otherwise committed at the end of the reporting period.

All of this is particularly relevant given the guidance from the Charity Commission on reserves, in which they say: “Deciding the level of reserves that a charity needs to hold is an important part of financial management and forward financial planning. Failure to do this may result in reserves levels that are either:

  • higher than necessary and may tie up money unnecessarily. Holding excessive reserves can unnecessarily limit the amount spent on charitable activities and the potential benefits a charity can provide
  • too low, increasing the risk to the charity’s ability to carry on its activities in future in the event of financial difficulties, and increasing the risks of unplanned and unmanaged closure and insolvency.

Poor governance

So what is the ICAEW plan for its strategic reserves that are not even mentioned in its accounts? It is simply not known. At the very least this represents poor governance. At worst, with its total reserves exceeding its annual income, with that income arising from very reliable sources, the reserves held appear to far exceed the needs of the ICAEW, threatening its public interest goals.

As a result I, with colleagues at Sheffield University Management School and in the Corporate Accountability Network, have suggested that the ICAEW should use its excess reserves – whether they be the £127m it admits to or the higher sum I prefer – to transform the education of undergraduate accountants so that they are prepared for the real world challenges that they will face. It should also endow a fund to provide training for young people in finance while still at school based on the Duke of Edinburgh award, giving multi-level awards that could help them find work. These, I suggest, are what use of these funds for a public purpose might look like.

The ICAEW now needs to rise to the challenge. It must improve its governance and accounting. And it must act in the public interest. That is, after all, what it was set up to do. What it cannot do is just sit on this money. That is utterly unacceptable.

ICAEW’s response

AccountingWEB approached ICAEW for comment on the report. 

The institute told AccountingWEB that it discloses the cumulative amount in its financial statements. Including all associated cash flows (fine income, levy income, case costs, case cost recoveries), ICAEW said the net gain is £127m of which £108m is fine income.

ICAEW spokesperson: “Our reserves are a matter of public record and we have always been transparent about them. They exist to sustain ICAEW over the long term in its commitment to serve the public interest. A strong balance sheet makes ICAEW a resilient and enduring force for good in the economy and enables us to fund initiatives which support our strategy and are consistent with the obligations set out in our Royal Charter. For example, we are currently investing in the Rise programme, a UK-wide scheme providing thousands of school students from disadvantaged socio-economic backgrounds the opportunity to gain vital workplace skills.

“We thank Sheffield University Management School for their proposal that ICAEW uses its reserves to subsidise accountancy professional education and research in universities. As they know, we have always been ready to discuss their ideas in detail, and that offer still stands. Ultimately, any decision about our reserves will be taken by ICAEW Board and Council.

“Until quite recently, many audit-related investigations undertaken by the FRC were funded by the mechanism set out in the Accountancy Scheme which was established by the regulator in 2004. Under the Scheme, accountancy professional bodies paid for these FRC investigations in advance and in return, they received any fines imposed by the FRC. All audit investigations by the FRC are now being conducted under its Audit Enforcement Procedure, introduced in 2016, by which all fines in those cases pass to HM Treasury.

“ICAEW would welcome the closure of the Accountancy Scheme for non-audit investigations as well, with the money from all fines in all cases in future going to HM Treasury. We expect that the proposed Corporate Governance and Audit Reform Bill will enable the regulator to do this, and we continue to urge Government to bring this legislation forward at the earliest opportunity.”

Replies (9)

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By Hugo Fair
01st Jun 2023 15:26

"Do as I say, not what I do" seems to be the mantra ... just a little more obviously, and entirely without shame, as each year passes.

And the ICAEW spokesperson ... where do they go to be trained in such obfuscation and avoidance of the facts?

Irrespective of my opinion of RM's proposal (which feels more diversionary than corrective), ICAEW seem overly keen to discard professionalism and ethics (presumably on the basis that neither HMT nor HMRC have any need of such old-fashioned attributes)!

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Replying to Hugo Fair:
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By AndyC555
01st Jun 2023 16:11

""Do as I say, not what I do" seems to be the mantra ... just a little more obviously, and entirely without shame, as each year passes."

Surely not a reference to the refusal of our gallant campaigner for openness, transparency and paying a 'fair' amount of tax to publish his own tax returns? He's got nothing to hide, honest!

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Replying to Hugo Fair:
By SteveHa
02nd Jun 2023 11:16

Hugo Fair wrote:

And the ICAEW spokesperson ... where do they go to be trained in such obfuscation and avoidance of the facts?

The House of Commons, I suspect.

Thanks (1)
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By Postingcomments
01st Jun 2023 15:53

"use its excess reserves..........to transform the education of undergraduate accountants so that they are prepared for the real world challenges that they will face. "

Ah, I see. Richard wants all this money to be diverted to universities - so that he and his colleagues can eat it up - upping their pay and stuffing even more into their pensions. Don't the university lecturers make enough, Richard? After all, they charge a fortune for their courses and get students into such huge debts for them.

Also, are you suggesting that, despite charging all that money, that their university eduation is inadequate? Would it be so hard for you to use some of the £10k pa per student to run whatever workshop or lesson you'd like to see?

Yep, I see right through this plan, Richard. It is very transparent to someone who has been facing challenges in the "real world" (as you call it) for a while. Maybe you could give me £1m or so of the money you grab to act as a consultant to you?

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By mkowl
02nd Jun 2023 10:06

Not a vested interest by an academic seeking funding for academic purposes then

Perhaps Sheffield University should contribute to the transport infrastructure in Sheffield for the public good

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By Arbitrary
04th Jun 2023 14:34

Since the fines result from the hopeless activities/behaviour of chartered accountants, it seems odd that these FRC fines should be retained by the ICAEW. This should perhaps be stopped for the future in some way, perhaps by restructuring the FRC as an independent organisation. As to accumulated funds so far, if they cannot legally be donated for charitable purposes (could they be?), perhaps they should be used for educational purposes in the accounting profession, perhaps not as proposed by the writer; any uses of the funds will be a beanfeast for someone, which may explain ICAEW's reluctance to make up its mind.
The important thing for me is that ICAEW does not receive such funds in the future.

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By listerramjet
05th Jun 2023 04:26

The ICAEW is an organisation accountable to its members. As such how it conducts its affairs is something for its members to decide, in accordance with its governing charter. Not for some loudmouth lobbyist to dictate! And the same would be true for the other venerable accounting institutions.
Besides which, if government really wants to legislate then it would need to get its own house in order first. Perhaps finally accepting that the use of the term accountant should be reserved to qualified accountants. I suppose it would be too much to ask that the same might be true for professional economists!

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John Toon
By John Toon
06th Jun 2023 11:12

Fascinating...

I wasn't aware the ICAEW was a charitable organisation(!) so half the article is almost entirely irrelevant other than to find some elusive straws to clutch at. It was so bad I haven't even read the ICAEW reposte.

I would also suggest that the 5 strategic objectives listed would be extremely costly to achieve to the point where none of them are achievable collectively. The first objective: of building trust in the ICAEW, would cost many millions if only because you can only build trust in an organisation if it's well known and recognised, which, I'm afraid to say, that outside the echo chamber it is not.

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By abelljms
20th Nov 2023 12:35

Until the disciplinary process is put out to a separate body, it's logical the fines will be retained. Member fees are high enough without removing this source of 'income'?

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