Should ICAEW benefit from audit failure millions?

I have never had much enthusiasm for professional self-regulation. Candidly, I do not think it works. 

The mess that financial regulation of auditors got itself into until the recent spate of fines began, largely as a result of political pressure being applied to the Financial Reporting Council (FRC), provides some support for that view. It is reinforced by an awareness that when a major auditor is fined by the FRC the fine in question is reimbursed, net of costs, to the professional institute that had the primary responsibility for regulating the firm found guilty.

This issue has been highlighted by the £14.4m fine imposed on KPMG this week concerning its audits of Carillion plc before that company failed in early 2018. Let’s leave aside all the rights and wrongs of the accounts of that company at that time. Let’s leave aside as well the fact that I think the rules issued by the Institute of Chartered Accountants in England and Wales (ICAEW) on the recognition of distributable reserves contributed to the failure of that company. Instead, let’s note that the net benefit of this fine is going to boost the coffers of the ICAEW.

Opportunity for profit

The simple question to be asked is whether this is appropriate? Can it really be right that a cosy club-style arrangement between the FRC, ICAEW and other professional institutes can result in a bunch of accounting regulators imposing fines that then go back to boost the coffers of those professional institutes whose task it was, in my opinion, to make sure that audit failures of the sort that are now commonplace should not have occurred in the first place? My answer is that quite emphatically it is not. 

There are two good reasons for saying so. The first is that in a profession where independence is supposed to rank highly, and is the foundation of audit ethics, this looks like a deal cooked up between mates from which all might profit. I am well aware that might be a controversial thing to say, and that those involved might well act with the utmost probity, but when it comes to independence it’s the appearance as well as the practice that matters. That is most especially true when an arrangement appears to provide an opportunity for profit.

This one does not provide that appearance of independence between the regulators, the regulatory process and the outcome. As the FT noted this week, in the past two years the ICAEW and the Association of Chartered Certified Accountants (ACCA) might have benefitted by more than £50m as a result. The resulting contribution to the ICAEW accounts is bizarre. This is the income statement from their 2021 annual report (which I had already read, because that’s what I spend my leisure time doing):

And just to set this in context, because we are accountants after all, this is the statement of affairs:
 

In 2020, recovery of regulatory costs and fines contributed £12m of the £15.1m of net operating income of the ICAEW. When fines reimbursed were then added in as well the regulatory process overall contributed £25.5m of the total £35.4m surplus for the year (72%). In 2020 the equivalent figure was even higher at £29.8m. Overall what that means is that of the £132.4m of reserves held by the ICAEW, £55.3m (41.8%) had come from this one source in just two years. 

Unworthy cause

I can think of many causes that could benefit from £55.3m right now. I have to admit that the ICAEW has never come close to coming top of that list. When as a result it looks conflicted on this issue I suggest it was a mistake to receive these funds.

That sentiment is compounded by my second concern. I think that if anyone is to benefit from audit failure it should be those who have lost as a result. In other words, the fines should be paid to the liquidators of the companies that have failed to compensate those who have lost as a result of that failure. It is very hard to think of a good reason for doing anything else. Not only is the victim compensated, but the profession is also seen to be doing its duty on behalf of society. It is currently very hard to see how the payment arrangements in place fulfil the criteria within their Royal Charters.

We all know audit reform is well overdue to happen. We also all know that it will not be happening any time soon, in all likelihood. But it is now beholden on the ICAEW, in particular, to put this matter right. Either it can make voluntary payment of these fines to those who should have benefited from them or, if that is not possible, put the funds into a charitable trust to benefit those who might otherwise not be able to afford accountancy training, for whatever the reason, whether here or overseas. But for the ICAEW to benefit is ethically impossible, in my opinion, and it’s time this was recognised.