The Financial Reporting Council (FRC) has fined EY £1.8m over misconduct in relation to the audit of the financial statements of Tech Data Limited for financial year ending 31 January 2012.
Julian Gray, senior statutory auditor and audit engagement partner has also been fined £59,000 after he and the firm admitted that their conduct “fell significantly short” of the expected standards.
EY and Gray also admitted that they “failed to act in accordance with the ICAEW's Fundamental Principle of Professional Competence and Due Care”, according to a statement from the FRC.
The audit misconduct related to a failure to obtain reasonable assurance that the financial statements were free from material misstatement, failure to obtain sufficient appropriate audit evidence and failure to exercise sufficient professional scepticism.
EY was originally fined £2.75m, and Gray £90,000 before having the fines reduced for mitigating factors.
I make no apology for quoting at length, largely because this feels like a reproduced press release in any event, and because to do so is in the public interest.
The reason for doing so is that this is yet another case where it is obvious that a Big Four audit firm has failed. And these failures are persistent: so persistent, in fact, that the utterly incompetent FRC should no longer ignore them, despite the fact that it is, itself, hopelessly captured by the Big Four firms.
As The Times noted behind its paywall this week:
It's the watchdog at the heart of capitalism. It has the power to investigate, rebuke, fine and ban accountants for life.
It ought to have the audit profession in its thrall. It ought to be playing a potent deterrent effect in keeping auditors straight and prudent and so preventing future financial scandals and frauds.
Yet, according to its critics, the Financial Reporting Council, far from baring its teeth, is much more likely to shut its eyes to questionable practices and roll over to have its tummy tickled.
In June it cleared PWC over the Tesco accounting scandal. The supermarket group lost £326 million over the affair, but its auditor was found to have done nothing wrong.
In August it cleared KPMG over its audit of HBOS during the financial crisis. KPMG had given the bank a clean bill of health in February 2008, only eight months before it collapsed and had to be rescued with £20 billion of taxpayers' cash.
And last month it cleared PWC over its checks on Barclays. The lender had already been fined £38 million for improperly mixing up client assets with its own money, yet PWC, which repeatedly had signed off on official reports saying that Barclays was complying with client asset rules, was declared innocent.
Some investors say that the exonerations are part of a pattern that goes back years. The Financial Reporting Council, they argue, has been “captured” by the profession it is supposed to regulate. Its people, its governance, its funding arrangements, its legal status and its processes and culture are all said to conspire to prevent it properly policing the nation's accountants.
And as they added:
The FRC is particularly well-stocked with former bank auditors in powerful positions. Brendan Nelson is a former head of banking audit for KPMG, ultimately responsible for the audits of not only HBOS but also Bradford & Bingley, which similarly failed, and the Co-operative Bank, which came very close. He now sits on the FRC's financial reporting review panel, the powerful committee to which investors are directed to make complaints about company reporting.
His verdict on bank auditors? They “discharged their responsibilities diligently in the context of what the statutory audit responsibility represents”, he has said.
Another former bank auditor now advising the FRC is John Hitchens, former head of audit at PWC. As such, he was responsible for the audit of Northern Rock, as well as of Lloyds TSB and Barclays. PWC was criticised by the House of Lords economic affairs committee, which said that it was “astonished that PWC appeared not to recognise an amber light that flashed so brightly”. He is now deputy chairman of the financial reporting review panel. He is also chairman of the banking committee at the Institute of Chartered Accountants of England and Wales.
It isn't only banking where the arrangements can look too cosy, critics argue. Jimmy Daboo sat on the financial reporting review panel for ten years until 2015. A partner at KPMG, Mr Daboo was responsible for auditing Rolls-Royce. Those audits are now being investigated by the FRC's conduct committee.
The FRC is no longer fit for purpose. I am at present joining with colleagues in academia and elsewhere to say so.
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You’re absolutely right to focus on the supine approach of the Financial Reporting Council. It is inconceivable that a US regulator would be rolled over so easily.
The shockingly high level of fine for EY (£1.8 million) will probably break the company. It is, of course, about 1 part in 30,000 of its annual turnover of about £25 billion. This fine corresponds to their worldwide turnover in about 20 minutes. What on earth are the FRC thinking about with these derisory fines? There are many executives in EY who are paid more than £1.8 million per annum. The FRC should be ashamed of themselves on every count.
Keeping with my theme on neo-liberalism being equivalent to antibiotic resistant bacteria, the resistance to change is obviously because the bacterium is good at replicating itself quickly throughout the system as well as being good at appearing to be benign bacteria. Very clever.
One thing that has always struck me about neo-lib Thatcherism is how much fraud and corruption arose as markets were liberalised.
i strongly suspect there arent that many UK EY partners paid in excess of 1.8m a year, the board probably but certainly not some low level audit partner
I suspect the median is above £500,000
It is a characteristic of British regulation of industry over many, many decades that the regulator is “captured” by the industry it regulates. I did not discover this proposition, nor is it recent; it has been made before, and very eloquently.
This also applies to Government Departments. Think of the Department of Agriculture and Fisheries; gone, and unlamented. Returning to non-departmental regulators, think of the Financial Services Authority, whose splendidly hapless regime ran from 2001-2013; gone and unlamented.
I invite commenters to list their own British regulatory howlers; we could be here for some time. We have an endemic problem with regulation in britain. I wonder why? Actually I don’t.
The self-serving mythology is that only experienced practitioners in the field can possibly understand the branch of activity which they regulate.
So we get a self-regulating press, and other media, self regulating police forces, legal system, medical practitioners, utilities providers, ….etc.
Very occasionally a case breaks into the public domain and finds its way into court.
This internal governance was hard-wired into the Thatcher era deregulation and privatisations as a pension/sinecure system for retired practitioners.
I don’t think she intended to do this, but had so little grasp of how any of this worked that Dennis’ pals just sorted it for her so she could fight the next hurdle that stood in the way of elite prosperity. And people almost deify the woman.
I recall that 12 days ago Richard ran a post entitled “State-capture-starts right here in the UK”
http://www.taxresearch.org.uk/Blog/2017/10/06/state-capture-starts-right-here-in-the-uk/
The main story there concerned systemic corruption in South Africa. One or two commenters didn’t seem to understand what state capture was another complained that the title was misleading because the post was about South Africa and not the UK.
At the time I responded to that with a couple of points:
(that state capture often) ‘becomes manifest through changes to the rules that govern business and the extent to which they are enforced. As for the UK. I think that we saw a good example recently right here:
http://www.taxresearch.org.uk/Blog/2017/09/22/how-could-the-frc-have-decided-kpmg-were-in-the-clear-when-the-issues-were-known-at-the-time/
The Financial Reporting Council lets an obviously culpable KPMG off the hook and:
‘An FRC spokesman said: “We undertook a thorough investigation which included the opinions of external experts. Our conclusion is that the test for misconduct was not met.”’’
I further noted that: (we should be): ‘looking at “the test” and how it came into being. As a general rule for understanding state capture one should look for the sort of regulatory changes that create moral hazard and those put the fox in charge of the hen house.’
It is now reassuring to see that The Times (no less) has concurred to some extent and even gone so far as to name some of the foxes concerned.
Which is why ran the story
And am ok eased yo be involved in pursuing it
You have done well in pursuing it and in continuing to do so.
It seems to me that the FRC problem has become more than a matter of accountability for accountants. It has now become symbolic and a matter of broad principle. If it is left unresolved it establishes a precedent whereby the complete capture of regulators becomes openly accepted practice.
The FT, Telegraph and Times all seem to think a line has been crossed
Good
Gloves, Richard ! 🙂