Auditors are facing a much tougher environment when their work goes wrong. Figures released by the Financial Reporting Council, the UK’s audit watchdog, show that total fines imposed on auditors in 2018–19 almost tripled on the previous year, from £15.5m to £42.9m.
The news comes as the government considers measures to improve audit and the market for audit services following a number of reviews. The review came after concerns about audit resulting from the collapse of construction giant Carillion at the the end of 2017. One review, by Sir John Kingman recommended the FRC’s replacement with brand new regulator, the Audit, Reporting and Governance Authority (ARGA).
The FRC also said the use of non-financial sanctions had increased from 11 to 38. Regulators have expanded their resource in the Enforcement Division by 25% and stepped up the use of “horizon scanning” techniques to spot potential problems.
According to Elizabeth Barrett, the FRC’s executive counsel, this increased regulatory activity “sends a clear message” to audit firms that the watchdog is determined to take action.
“Improved behaviour by those we regulator requires recognition that where failures occur their root causes must be identified, effectively addressed and reported to us,” she said.
The largest fined imposed by the FRC in recent times was the £10m levied on PwC last year for its work on the audit of BHS, the collapsed department store chain. The fine was reduced to £6.5m following an early admission by the firm and the audit partner involved. PwC was also severely reprimanded.
PwC also received a £6.5m fine (reduced to £4.5m) in June for its audit of Redcentric plc, an IT services provider.
PwC is not alone in having faced sanction. In May KPMG was fined £5m (discounted to £4m) for the audit of The Co-operative Bank and in April received a £6m fine for audits of Equity Syndicate Management.
Audit quality “not acceptable”
Just weeks ago the FRC issued its annual report on audit quality insisting it had to improve after finding that only 75% of FTSE 350 audits were assessed as “good” rather than the target figure of 90%.
Stephen Haddrill, the outgoing chief executive of the FRC, said: “At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable. Audit firms must identify the causes of their audit shortcomings and take rapid and appropriate action to improve quality. Our latest results suggest that they have failed to achieve this in recent years.”
The watchdog has recently begun reviewing ethical standards for auditors. The work focuses on improving the test for an independence of auditors from their clients. The regulator also proposes replacing the list of “prohibited” services that can be supplied to an audit client with a shorter account of “permitted” services.
Auditors and the audit market are under close scrutiny. The Kingman Review looked at regulation, while a review by the Competition and Markets Authority has examined the audit market. Another probe, the so-called Brydon Review, is currently looking at the quality and scope of audits.
The chief executive of new watchdog ARGA was recently announced as Sir Jon Thompson, the chief executive of HM Revenue and Customs.