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Pocketing cash

Should ICAEW benefit from audit failure millions?


With ICAEW pocketing KPMG’s £14.4m fine for its Carillion audit failings, Richard Murphy says it’s time to accept that self-regulation doesn’t work.

20th May 2022
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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):

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

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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. 

Replies (12)

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By Justin Bryant
20th May 2022 09:08

Arguably yes. Here's an example of how finding problems at firms can be financially incentivized:

The problem here is the incentives work the other way, as the regulator does not want to ruffle too many feathers for its Big 4 paymasters.

Thanks (2)
Replying to Justin Bryant:
Tom Herbert
By Tom Herbert
20th May 2022 09:39

Thanks for flagging that Justin - what an utterly mind-melting case. Does a middle way between the current light touch boys' club approach and incentivising rotters like your man in the Dechert case exist?? Surely it's not within the wit of humanity to find one...

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Replying to TomHerbert:
By Justin Bryant
20th May 2022 10:17

Obviously yes, although my main point above was that disincentives to investigating the Big 4 should first be removed. See more on the other story here:

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Replying to Justin Bryant:
By Hugo Fair
20th May 2022 15:55

Hadn't realised that this case had finally concluded (having been keeping a long-distance eye on it via the pages of P Eye for many years) ... so thanks.

Particularly liked ... ""Trust among partners is integral to any partnership, and throughout this litigation, Dechert has always acted in good faith in reliance on the assurances given to us by our former partner", said the firm, gently lowering Gerrard into the path of the speeding bus."
Perfectly describes what they all do (whilst wearing gloves to avoid fingerprints)!

But it's the SFO (aka Serious Farce Office) that looks to have sustained yet more damage, again.

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By AndyC555
20th May 2022 10:34

"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"

There's a lot of this 'cosy club' stuff going on.

I'm aware of someone whose mate wanted a grant from a charity but the charity didn't give grants to individuals so he resurrected an LLP that had been dormant for around 8 years that he and the mate were members of, applied for and got the grant and the LLP promptly paid around 97% of that grant straight to the mate.

Probably within the letter of the rules but certainly not in the spirit of them and morally dubious. Especially when that person is constantly moaning about companies who avoid taxes by staying within the letter of the law but are outside his self-defined spirit of the law.

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Danny Kent
By Viciuno
23rd May 2022 11:21

You had me until you suggested that IP received the funds! They already get a disproportionate share of any assets a liquidating company has - and fee at what are quite frankly ludicrous charge-out rates.

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By lme
24th May 2022 10:39

Isn't it misleading to call it self-regulation? The FRC is not the ICAEW, and the ICAEW's own regulatory board runs disciplinary hearings through majority-independent panels. Cosy, perhaps - self-regulation? - no, I don't think so.

It's awkward when your regulator (or whatever higher power) makes rules that give you a conflict. It's at least short-sighted and at worst is highly corrupt. Undoubtedly ICAEW should have handled the fine money with more transparency and arguably should have pushed back far more strongly - but there are clear challenges in pushing back at your regulator!

This issue deserved to get blown up but its amongst many failings that reflect badly on the profession. I think the entire system needs reform. It's not generally supporting us to do the right things.

Thanks (1)
24th May 2022 11:53

Why does the Institute benefit for its members mistakes ? Don't improve Audits when sloppy work will fill the coffers of itself
What about other people who lost out eg shareholders, employees, pension funds and creditors.
Why indeed improve work when self interest appears to be so important

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By Rgab1947
24th May 2022 11:32

The fines were to low in any case.

The money should go to the investors who got screwed by the dodgy audit.

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By David Gordon FCCA
24th May 2022 12:04

Be careful what you wish for.
Auditing regulation is politically sensitive. As soon as HM Govt or Quangos get involved you will have ideologues attempting to score political points, rather than dealing with matters in hand in a "Professional matter"
The professional organisations ought, reasonably, to recover any costs they have incurred in investigating a matter. It should be for an independent tribunal, as with assessing legal fees, to approve those costs and if needed apportion them between the organisation and the defendant.
Any Penalties over and above costs should go to a separate designated fund (See Charities) for distribution as proposed and decided by members at an AGM
This will bring transparency into the matter, and promote interest in any AGM
In these matters it is not Firms, LLPs, or Companies at fault. It always Natural Persons who have been found wanting, so it they who should be penalised.
Most important, employees without fault, who lose employment as a result of a superior's misdemeanor should, in regulation and or law, be compensated.
This mitigates a major moral issue at any tribunal; If I find Scrooge guilty does it inevitably mean that Tiny Tim will starve?

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By Digit Dabbler
24th May 2022 12:26

The regulatory body’s failure to properly regulate their members, especially at audit level, should be penalised not rewarded. They should be paying a percentage of the fine imposed on the member; and the fine should be paid out as compensation to those who suffered as a result of those failings.

Nearly £34m surplus suggests ICAEW have lost sight of their purpose as they obviously have the capacity to do far more regulating …… but why bother if they get the cookie jar when it goes wrong.

No wonder the systems broken. Just implement joint culpability. That should shake things up.

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By AndrewV12
25th May 2022 08:09

The current position clearly is not working, the trouble is what do you change it with. But change has to come, its laughable at the moment, I doubt many place reliance on a Audit report.

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