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Firms issuing unqualified audits get massive disciplinary fine

The big fines in this month’s disciplinary orders went to Deloitte and Hodge Bakshi for issuing unqualified audits. The latter firm was ordered to pay over £50,000 in fines and costs. 

5th Oct 2020
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Audit report
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This month, ICAEW severely reprimanded an accountant and two big firms in separate cases for signing unqualified audits – all of these disciplinary orders came with big fines.

None of the September ICAEW disciplinary orders made it to tribunal. Instead, the orders were split into eight consent orders, four fixed penalty orders and seven regulatory orders from the audit committee.

As always, Chris Cope, solicitor and now a consultant with Blake Morgan LLP (solicitors) is on hand to cast his expert eye over the cases.

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Hodge Bakshi

Hodge Bakshi was hit with a £41,210 fine and costs of £9,140, the biggest financial punishment in September’s disciplinary orders.

The Cardiff-based firm agreed to a consent order made in August 2020, which ruled that it should pay over £50,000 in fines and costs and be severely reprimanded after complaints of issuing unqualified audits.

The Investigation Committee unearthed three occasions where Hodge Bakshi failed to conduct an audit in accordance with international standards on auditing.

For two separate limited companies, on 30 September and 26 November 2016, the auditor didn’t obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions.

These two different audits lacked evidence in the recoverability of directors loans and intercompany loans, the prior period adjustment and the reliability of representations following concerns over the integrity of management.

More questions were raised by the Investigation Committee over Hodge Bakshi’s statement setting out their ceasing to act as an auditor for one of the limited firms above. The statement issued on 21 July 2017 did not set out the reasons for the firm ceasing to act as auditor; a requirement of section 519 of the Companies Act 2006.

Chris Cope comments:

When presented with a consent order, a firm has the right to accept or reject. If rejecting, the case is automatically referred to the Disciplinary Committee.The problem faced by any member or firm in these circumstances is that the outcome at the Disciplinary Committee is unknown. Whereas the Committee is not informed about any aspect of the rejected consent order, it will follow the sanctions guideline.

Although a good plea in mitigation may persuade the Disciplinary Committee to be lenient, there is always the possibility that the Committee may impose a similar sanction as was proposed in the consent order. It is conceivable, although unlikely, that a more severe sanction could be imposed.

And then there is the matter of costs. The Institute’s costs will increase above those incurred before the Investigation Committee. In addition, if the member or firm is legally represented, there will be those costs as well.

Add to this the time that the member or firm will have to spend on the matter, including the hearing (almost certainly to be conducted digitally), together with levels of stress and worry, you can imagine that most consent orders are accepted, despite the member/firm being aggrieved at the outcome.

I would imagine that Hodge Bakshi took all of this into account before reluctantly accepting what was on offer.

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Deloitte

The next biggest fine this month went to Big Four firm Deloitte. The ICAEW reprimanded the firm after it issued an unqualified audit opinion, and ordered it to pay a fine of £12,250 and costs of £4,020.

This is not the first time this month the Big Four firm has been in the headlines over audit failings and big fines. Earlier this month the FRC chastised Deloitte with a £15m fine over its audit of the ill-fated software company Autonomy.  

This punishment from the ICAEW pales in comparison to the Autonomy fine, but is another chink in Deloitte’s audit record.

The consent order made in July 2020 relates to the audit of “A” plc where the appropriate accounting policy of IAS8 (‘Accounting Policies, Changes in Accounting Estimates and Errors’) was not applied to its financial statements in relation to merger accounting.

Another audit failing showed that the cost of the investment in “B” Limited had not been recognised in accordance with IAS 27.

The Investigation Committee found the same unqualified audit opinion occurred for four years running with the same PLC, starting from the 27 August 2014.

Chris Cope comments

You might be forgiven for thinking that Deloitte, being an infinitely larger firm of accountants than Hodge Bakshi, should have been paying a fine well in excess of £12,250 and more like the fine of £41,210 imposed in the other case.However, fines are not calculated on the basis of the size of the firm.

In audit cases, the tribunal (whether Investigation Committee or Disciplinary Committee) takes into account:-

  1. The gravity/duration of the breach.
  2. The degree of responsibility.
  3. The member’s/firm’s financial position.
  4. The profits gained or losses avoided.
  5. The extent of cooperation.
  6. Previous breaches.

It will also need to determine whether the conduct is:-

  1. Very serious, i.e. deliberate, knowing or dishonest. Penalty ranges from £15,000 to £20,000.
  2. Serious, i.e. reckless/wilful blindness. Penalty ranges from £5,000 to £10,000.
  3. Less serious. Penalty ranges from £1,000 to £3,000.

Finally, in the alternative, if deciding the audit work was of a seriously defective nature, it may impose a penalty of 1.5 times the audit fee, or, if deciding there have been lesser forms of bad audit work, impose a penalty of half the audit fee.

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Andrew Needham

Andrew Needham was also subject to a consent order over unqualified audits which led to a severe reprimand and over £10,000 in fines and costs.

The Sheffield-based ACA was admonished by the Institute after signing an unqualified audit report on behalf of his firm. The Investigation Committee flagged the offending audit report signed on 28 February 2017. Needham failed to obtain sufficient audit evidence in a multitude of areas, including tangible fixed assets, revenue, expenditure, trade and other payables and wages and salaries.

The Investigation Committee also questioned the appropriateness of management’s use of the going concern assumption in the audit report. Needham was chastised for failing to obtain sufficient evidence between the date of the financial statements and the date the audit report was signed.

The consent order imposed Needham with a severe reprimand and ordered that he pay a fine of £7,000 and costs of £3,454.  

Chris Cope comments:

In the present financial climate, any accountant faced with an adverse finding by a tribunal should carefully consider what financial information should be produced in order to convince the tribunal that they be given time to pay. Generally, 12 months would be considered reasonable. However, without detailed financial information, a tribunal is unlikely to order payment by instalments.

If you are presently subject to a complaint, you can find out more information on Blake Morgan here or call 0238 085 7047.

Replies (7)

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By BryanS1958
06th Oct 2020 10:33

It seems unreasonable, and reflects the ICAEW's (and regulators in general) tendency to work for the benefit of large firms, rather than small firms, that the fines are not based on, say, a firm's turnover and are thus unduly punitive for small firms and a minor irritant for large firms.

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Replying to BryanS1958:
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By flightdeck
06th Oct 2020 11:40

I have no expertise in audits but I agree with you. The big 4 have comparatively enormous resources to do things right - they can invest in strong procedures, in systems to help catch issues, in internal reviews and inspections, more money for more people and people with more experience, they are doing more work and thus more rapidly deepening their expertise etc etc. Their continued failings point, I think, to a lack of investment in the business by the partners. So, might as well go with a smaller firm because in fact you are not getting any of the above with the big4??

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By Rgab1947
06th Oct 2020 10:43

Deloittes - Its petty cash for them.

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By Ian McTernan CTA
06th Oct 2020 11:59

Who would want to be a small audit firm?

Make a few errors and be hit for fines and costs at a considerable percentage of total yearly turnover. Huge impact on the livelihood of the owner whose pocket it will have to come out of.

Be a big firm- make the same errors (when you should be judged to a higher standard) and be fined 1% of the partner's yearly take home income, if that. Partner won't even notice it.

So glad I'm not an auditor nor an audit firm and have no desire to ever do one.

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Replying to Ian McTernan CTA:
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By Paul Crowley
06th Oct 2020 20:31

We gave up on the basis of no audits left
They are easily avoidable

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By Paul Crowley
06th Oct 2020 20:37

I would love to know the background of No 2
An independent examination going back to 2013, accounts failed to disclose'material contingent liabilities'
Would the trustees of a small charity even understand the term, let alone know what was needed.

AND only the one year, seven years ago.

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By Mr J Andrews
07th Oct 2020 09:35

Rather than pitch the fine in proportion to a company's turnover , and as Chris infers, the penal consequence should fit the level of the 'crime'. The plural reference in Case 1 indicates this to be so and I would hope the ICAEW take the hardest line on ignorance and dumb cowboy handling.
Limiting the fine to point 3 - the firm's financial position - would, I suggest, encourage such culprits to carry on regardless.

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