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Auditing scandals are cause for despair

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What will it take to make auditors do their job properly? KPMG’s latest fine for the Carillion cover-up seems like a missed opportunity to get the profession back on track.

24th May 2022
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Sometimes you just have to despair.

I realise that in many ways the accountancy profession is merely a reflection of what is going on in society but surely we can do much better than the latest scandal suggests.

After all, accountants have always enjoyed a reputation for respectability, responsibility and probity. That is now in tatters.

Even by the low standards that the leaders of the industry have set in recent years, the tale of KPMG’s fraud and forgery must surely take the biscuit.

As if it wasn’t bad enough to audit Carillion so ineffectively that the company went bust with stakeholders including the government (in other words you and me) taking a massive hit, there was then the kind of cover-up that would suggest that ethical standards have fallen by the wayside.

Highly embarrassing

Recent stories on AccountingWEB suggest that what might have been highly embarrassing for all involved has now become something considerably worse.

Various employees of the firm have been subject to large fines, which are probably deserved. However, there has to be a reasonable chance that they were acting on the instructions of others and are merely being used as fall guys. Their careers will be blighted but others who may have been implicated will escape scot-free.

Cost of co-operation

I might be the only one, but I do not quite understand why KPMG’s admission of guilt when the firm was indisputably guilty should be a reason for knocking approximately £5m off the original £20m fine.

Co-operation is clearly a good thing but is it really worth that much? Then again, when you discover that the fine levied by the Financial Reporting Council (FRC) goes straight into the coffers of ICAEW without touching the edges, that begs its own questions. If nothing else, it means that every member has benefitted to the tune of approximately £750 – including partners at KPMG.

Even then, I realise some readers might be concerned that after settling such a large fine KPMG partners may not be able to afford their heating bills this winter. The good news is that they will not be bearing the costs – their long-suffering audit clients will through higher fees.

Grossly inadequate

I could easily put forward a plausible argument that, had the profession governed its leading lights competently over recent years, there is a strong possibility that this disaster would never have happened. For year after year, the FRC reviewed audits by major firms, found them grossly inadequate but merely rapped some knuckles and waited for another year of failures.

Had they taken really strong action then surely the Big Four and those just below would have felt the need to improve.

What might that action of consisted of? It could be massive fines but a far more powerful tool would be to suspend or exclude those who had been running the substandard audits and, if you want to take it really seriously, haul those at the top of the tree, the head of audit or maybe even the managing partner, before a disciplinary committee and tell them that unless there is an improvement they will also be suspended and/or excluded.

This may sound ridiculously over the top, but when you look at the amounts of money that stakeholders lost – which might reasonably be at least partially attributed to the negligence of auditors – it suddenly seems pretty mild.

Lurching from disaster to disaster

None of this is good for a profession that seems to be lurching from disaster to disaster at the moment. I think the question has to be asked about whether KPMG is fit to continue auditing, but then again, their competitors’ audit capabilities have almost all been found inadequate too.

It is good news that the government has finally put audit reform back on the legislative agenda but given the heavy-weight proposed legislation in the Queen’s speech, I’m not too confident that it will actually make it onto the statute books before the summer.

The alternative is a case of physician heal thyself, so physicians, get on with it.

Replies (5)

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By geoffmw1
25th May 2022 10:58

I think that when moist budding accountants were O level and not graduates ethics were drummed in as of course. I also think that technology based audit has possibly resulted in less thought being given to audit procedures.

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paddle steamer
By DJKL
25th May 2022 12:42

geoffmw1 wrote:

I think that when moist budding accountants were O level and not graduates ethics were drummed in as of course. I also think that technology based audit has possibly resulted in less thought being given to audit procedures.

Surely Moist von Lipwig rather than Moist Budding.

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By Ben Alligin
25th May 2022 11:30

As a slight aside, but equally despairing is the istock photo at the beginning of this article.

God bless The Kennel Club for a breed standard that provides for such a monstrosity. The RCVS and Kennel Club are the veterinary equivalent of the ICAEW and FRC - equally futile.

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By GDavidson
25th May 2022 19:07

Good article. But the decline has been going on since the eighties and its greed is good/grab what you can ethics. Accountants are just reflecting society albeit somewhat magnified.

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By tedbuck
30th May 2022 11:56

I couldn't agree more.

The big firms should lead by example of excellence not greed and cover-up. Sounds a bit like Vlad's been at work - but then they were reluctant to pull out of Russia.

As it seems a lot of Russia's dirty money ends up in London one does rather wonder who their accountants are - or is that the next instalment of a seedy story? Probably also may apply to the legal fraternity as well as someone must do the conveyancing on the properties. Last time I bought anything sizeable the questions asked were like the Spanish inquisition so if I were a Russian Expat wouldn't they be even greater? Interesting thought isn't it?

And as for cash - stood in the bank the other day (HSBC) and the bloke in the queue in front of me (long queue) was saying he had to travel from his own branch 15 miles away because they had stopped issuing cash! A Bank!!!!!

I expect if he had been an oligarch they would have sent out for it for him.

Great days we live in.

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