Blog Full

The FRC has overseen a major uptick in audit enforcement activity recently, with the regulator issuing fines of £33.3m in 2022, a 77% increase from the previous year.  

The string of high-profile audit failures in recent years have been the catalyst for significant industry reform, but the profession is at risk of appearing ‘unattractive’ as a result, according to Nicola Scarr, audit partner at Haines Watts. 

In May 2022, the UK government announced it would revamp the country’s audit regime by implementing a new regulatory body, increasing the responsibility of large corporations, and diluting the monopoly of the industry’s Big Four firms.   

Significant corporate collapses such as Carillion in 2018 and Patisserie Valerie in 2021, were key catalysts for the overhaul. KPMG, the auditing firm responsible for the Carillion audit, faced a £1.3 billion lawsuit for purported audit negligence in the beginning of 2023. 

Scarr says: “It is important to understand and share when things go wrong, but the headlines can be a tough read. I always review the detailed reports to appreciate what has happened and take forward any learning, and I know we can all improve by doing that.  

“Restoring trust in the profession with audit reform is welcome; the challenge for us is our clients are typically locally-owned SMEs but the revision of standards applies to entities of all sizes.” 

This is echoed by Ian Graham, partner at Moore Kingston Smith, who says while it is not necessarily deterring people from entering the profession, it may prompt individuals to exit the industry.   

“The continued relentless negative publicity and pronouncements around audit are without any doubt putting people off wanting to continue their career and potentially put themselves in that position.” 

As part of the Carillion scandal, Pratik Paw, a former junior accountant at KPMG, managed to avoid a significant penalty and suspension for his involvement in the mishaps, receiving a “severe reprimand” instead. 

The developments, such as revised quality management standards, are welcomed by Haines Watts. The firm claims that it encourages enhancements to internal communication and self-reflection, extending even to its trainee staff. This fostering has increased open dialogues among team members at every tier, Scarr added. 

“We always strive for the best quality for our clients, but we are aware that we operate in an ever-evolving industry and processes, standards and markets in general are constantly changing.  

“We debrief at the end of an audit with both our team and clients to see where we can improve and add value across the entire audit process. This helps foster a culture of continuous improvement, and welcoming feedback, at all levels.” 

Writes Greg Noble in Accountancy Age

The proposed new rules come amid frustration in Washington that audit firms are not living up to their duty to protect investors from wrongdoing by their clients. 

Big Four accounting firms are fighting to block new rules in the US that would force them to take more responsibility for rooting out fraud at the companies they audit, the Financial Times has reported. 

To counteract these new rules, Deloitte, PwC, EY and KPMG are trying to sign up their clients to oppose the plan by telling them their fees will increase if the changes go through. 

According to the Financial Times, the firms have days to go before the end of a consultation period on the proposed new rules from the Public Company Accounting Oversight Board (PCAOB). 

The proposed new rules, which would widen auditors’ responsibility to scrutinise whether a company is complying with laws and regulations, comes amid frustration in Washington that audit firms are not living up to their duty to protect investors from wrongdoing by their clients. 

As a result, The Center for Audit Quality – a group that represents audit firms led by the Big Four – has asked corporate directors to sign on to a letter attacking the plan. 

The Financial Times said it understands the letter stated that “auditors are not lawyers and as a result the proposed amendments would expand the auditor’s role to include knowledge and expertise outside their core competencies. The proposal will substantially increase the cost of the audit without a commensurate benefit.”

The proposed rules have proven controversial even within the PCAOB, where they won support from only three of the five board members. The two other members, who have previously worked for the Big Four, both opposed the changes, with one calling them a “breathtaking expansion of the auditors’ responsibilities”.

Lynn Turner, a former chief accountant of the Securities and Exchange Commission who is now an adviser to the PCAOB, said existing standards provided too much “wriggle room” for auditors to avoid confrontation with management when they see potentially illegal behaviour.

Turner said: “The current standard doesn’t serve the capital markets in any way, shape, fashion or form. I’ve told the people at the PCAOB that this is a war and the war has begun. It’ll test those three board members and we will see if they’ve got a spine or not.”

Business lobby groups and the accounting firms are expected to put in comment letters opposing the new rules before a deadline on 7 August.

Writes Corina Duma in Accountancy Today

The FRC has revealed that a record number of cases were resolved in the year 2022/23 that resulted in financial sanctions of £40.5m being imposed, according to the council’s Annual Enforcement Review that was published today (27 July).

Quality improvements in enforcement investigations also resulted in discounts in headline financial sanctions ranging from 25-43%

The year saw the FRC’s highest ever sanction of £20m that was imposed by the Independent Tribunal in a case which “underscores the seriousness of providing deliberately misleading information” to the FRC’s inspections team.

According to the council, its ongoing commitment to “timely” enforcement actions is also reflected in year-on-year improvements in the published KPI over the last five years, with 75% of cases meeting the KPI in 2022/23.

In addition, it also reflected the maturity of changes implemented over the period, including growth in the Enforcement Division’s headcount and methods of honing case focus such as the introduction of in Division specialist senior audit expertise.

Quality improvements in enforcement investigations also resulted in discounts in headline financial sanctions ranging from 25-43%.

Elizabeth Barrett, executive director of enforcement at the FRC, said: “The record number of cases concluded this year reflects the strengthened capability and determination of the FRC to hold firms and individuals to account for serious accounting and audit failures.

“Timeliness has been a key priority over the last five years and significant ongoing improvements in this area are recorded in this year’s review.”

She added: “While higher financial sanctions are an important marker of the seriousness of the failings, non-financial sanctions continue to play a key role in driving improved behaviour and outcomes to deliver long-term positive change.”

Corina Duma writes  in Accountancy Today