UK accounting watchdog doubles total fines
Financial Reporting Council under pressure to be tougher on misconduct
The UK accounting watchdog has nearly doubled the level of fines it has issued in the latest financial year, as politicians and investors push for a tougher approach to misconduct.
Fines issued by the Financial Reporting Council rose from £6.8m in the 12 months to the end of October 2016 to £12.8m this year after the watchdog issued two record-breaking penalties.
This included a £5m penalty for PwC in May — then the largest ever given by the watchdog — for “misconduct” in relation to the audit of Connaught, a FTSE 250 social housing maintenance group that was put into administration in 2010.
PwC subsequently received another record-breaking fine in August of £5.1m for “extensive misconduct” relating to the audit of RSM Tenon, a professional services group put into administration in 2013.
In contrast, the average annual fines imposed by the regulator between 2011 and 2014 were just £1.1m.
However, the FRC’s fines remain a fraction of those issued by other regulators such as the UK’s Financial Conduct Authority.
The FCA fined German lender Deutsche Bank £163m in January, and its largest ever fine was £284m against Barclays in 2015.
Erik Gordon, assistant professor at the University of Michigan’s Ross School of Business, said: “It is surprising [accountancy firms] are not more severely penalised than they currently are. The damage to investors, including retirees, [of misconduct] is far larger than the fines imposed.
“Regulators could encourage auditors to put more emphasis on compliance by imposing more bans from the profession. The personal career threat of being banned from the profession for five years or even for life would cause the individuals who do the work to think twice about compliance.”
The fines have also been far smaller than the annual fees accountancy firms can earn from blue-chip clients, which often reach tens of millions of pounds.
“You cannot expect fines to have much effect when auditors face the choice of losing £20m in fees by displeasing a client or paying a far smaller fine. Fines that would be large enough to eliminate partner bonuses for five years would be more effective,” Prof Gordon said.
The FRC is in the process of reviewing its rules, including whether its penalties are enough of a deterrent to misconduct. Its conclusions are due to be published before the end of the year.
The sharp increase in the size of the penalties issued by the FRC comes at a time of growing pressure for the watchdog to toughen its policing of misconduct in the accounting profession.
Accounting scandals at large UK companies including Tesco, BT and Rolls-Royce have also turned attention to the role of auditors and the regulator that oversees them.
Guy Jubb, an honorary professor at the University of Edinburgh and corporate governance expert, urged the FRC to adopt more “innovative” penalties for accounting firms. This could include banning a firm from accepting new clients for several months if it commits a significant misdemeanour, or introducing stricter monitoring for the firm involved