Stop complaining about audit fines and improve your work, UK regulator tells firms

Accountants should stop complaining about extra scrutiny and fines for audit failures and improve the quality of their work, said the head of the sector’s UK watchdog, which imposed record financial sanctions on the industry last year.

Auditors have faced heavy criticism in recent years after failing to raise the alarm in a series of corporate failures, such as retailer BHS and outsourcer Carillion. The ensuing clampdown led to senior executives complaining that the Financial Reporting Council’s more robust approach was making the profession unattractive to recruits.

But Sir Jon Thompson, the watchdog’s chief executive, said he had no sympathy with them over the level of fines imposed. “It’s no good complaining about the fines,” he said in an interview with the Financial Times. “The solution is entirely in [the audit firms’] hands. Do a good audit and you don’t get in trouble with us.” 

His comments came after figures published last month showed that the FRC imposed a record £46.5mn of fines on accounting firms and partners in the 12 months to March. Fines after discounts for co-operation also reached a new high of £34.6mn.

An industry tribunal last month handed KPMG its largest-ever UK fine — £14.4mn — for deliberately misleading the regulator during inspections of its audits of collapsed outsourcer Carillion in 2017 and UK-listed Regenersis in 2015.

The FRC has stepped up enforcement action since it was branded a “ramshackle house” in a review of the regulator in 2018 by Sir John Kingman, the chair of insurer Legal & General, and has almost doubled in size since then, employing about 400 staff.

Sir Jon Thompson © FRC

Most of the sanctions in recent years have been against the Big Four — Deloitte, EY, KPMG and PwC — which have monopolised the market for large company audits and been criticised for poor-quality work.

But more recently the watchdog has switched some of its focus to mid-tier accounting firms, which it hopes will eventually compete with the Big Four for work on large company audits, and their smaller rivals.

The FRC’s latest quality inspections found that more than 80 per cent of audits at three of the Big Four were good or required only limited improvement. But last month, it criticised work by BDO and Mazars, two of the three main challengers to the Big Four, as “unacceptable”. Both firms said at the time they were disappointed with the findings and were investing to improve their auditing.

But consecutive years of poor inspection results at both firms, which have expanded their audit practices substantially, have led to senior auditors privately questioning whether the midsized players can withstand the regulator’s demands as they try to compete to audit large listed companies.

Underlining that point, they said, was the fact that the other main challenger, Grant Thornton, had the best inspection results of all the top seven firms after heavily cutting back the number of large companies it audits since poor results in 2019 and a series of fines.

“The FRC’s big stick approach has promoted audit quality . . . but the question is do they just persevere with this or do they now have to change their approach a little bit?” said a senior figure in the accounting industry. “Otherwise they’re never going to get any new entrants into the market.”

But Thompson, who took over in 2019 after heading HM Revenue & Customs, said that auditors’ complaints about the FRC criticising their scores in the inspections was “like blaming the doctor for saying you’re ill”.

But he acknowledged that there was a trade-off between improving audit quality and helping to build up potential competitors to the Big Four, which would help ensure that companies were still able to find auditors if one of the dominant players were to collapse or exit the market.

“We’re going to have to make some choices about what’s more important. And to be frank about it, our board’s view is that audit quality is more important at the minute,” he said.

Thompson’s pledge to prioritise quality concerns over competition follows a series of fines and investigations into smaller firms that sit below the mid-tier of BDO, Grant Thornton and Mazars. At least seven smaller audit firms have been penalised or investigated in the past 18 months.

Taking action against smaller firms is in the public interest, said Thompson, citing the FRC investigations into King & King, the high street firm that signed off the accounts of companies in the business empire of Sanjeev Gupta, which is the focus of a fraud investigation.

Part of the problem was that the biggest firms were “de-risking” by dropping clients whose audits they deem more difficult or whose management is resistant to scrutiny, Thompson added. These companies are left with a choice between a small audit firm or being unable to find an auditor at all.

Some auditors feel the FRC should have anticipated this problem. “This situation may have been an unintended consequence but it was certainly not unforeseeable,” said a senior Big Four auditor.

The regulator last year dismissed accountants’ request for leniency on higher risk audits. The FRC would like the most capable auditors to check the accounts of higher risk companies but is reluctant to lower its standards to encourage them to do so, said Thompson.

Instead of resigning, auditors should be more willing to qualify their opinion on the accounts and do more to encourage companies’ management to improve their governance, he said. “It’s unbelievably rare to find a qualified audit. Auditors will resign rather than give a critical audit opinion.” 

Although legislative reforms to replace the FRC with the more powerful Audit, Reform and Governance Authority “could have been done quicker” and have yet to be passed, the watchdog was now “pretty close” to the regulator envisaged by Kingman in his scathing review four years ago. Arga is not expected to be created before April 2024.

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