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Seven of the biggest sanctions handed out by the FRC

With plentiful coverage of fines and criticism, there is a growing perception that the standard of audits conducted by big accountancy firms is slipping. Such errors (or worse, mishaps worthy of censure by the regulator) are not only damaging to the company being audited, bu, reputationally for the auditors themselves.

The largest accountancy outfits provide services for some of the biggest companies in the world, and with the emergence of challenger firms like Mazars ready to capitalise on any slip-ups, it has become more important than ever for these firms to get to grips with their processes.

We have collated a list of seven of the largest sanctions handed down to firms from the Financial Reporting Council (FRC) in recent years. The sums are eye-watering.

  1. Grant Thorton 

Fine received: £2.27m 

Grant Thornton was handed a £2.27m fine alongside a record-breaking £21m in damages it had to pay, after its audit almost collapsed fire and safety management company Asset Co in March 2010. 

According to the FRC, Grant Thornton failed to keep track of tasks and resolve outstanding queries, which led to confusion and some key information and issues being overlooked. The regulator also found the firm had demonstrated “flawed judgements, deficiencies in understanding and insufficient appreciation of audit risks.”

A High Court judge branded the audit a “flagrant breach of professional standards”, exhibiting failures “of the utmost gravity”. 

  1. KPMG

Fine received: £3.5m 

KMPG was recently fined £3.5m in relation to client assets reports in respect of The Bank of New York Mellon London Branch and The Bank of New York Mellon in 2011. 

In May’s tribunal hearing, it said KPMG had signed off on reports for BNY Mellon that failed to comply with safeguarding rules for client assets between 2007-2011, over the financial crisis. 

The tribunal found the misconduct “consisted of a failure to understand and apply the fundamental rules of CASS, requiring the banks to keep their own records and carry out their asset reconciliations on their own legal entity basis.” It added: “No dishonesty or recklessness was involved but the misconduct involved the misapplication of rules that – are of very great importance to the financial system.”

  1. Deloitte 

Fine received: £4.2m 

Deloitte was fined £4.2m in relation to the audit of the financial statements of Serco Geografix Limited for the years ending 31 December 2011 and 2012.

The FRC said Deloitte and Helen George “failed to act in accordance with the fundamental principle of professional competence and due care.”

Deloitte was “severely reprimanded” for its audit work on the statements, while George received a £150,000 fine just in relation to the 2012 audit. 

The firm also agreed to pay £300,000 towards investigation costs, and set up training for its entire audit staff in line with FRC’s guidelines. 

  1. KMPG 

Fine received: £5m 

KMPG was fined £5m in relation to the 2009 audit of Co-operative Bank. 

The misconduct occurred shortly after the merger between the bank and building society Britannia, and KPMG and audit partner Andrew Walker both admitted that their conduct fell “significantly short” of the standards reasonably to be expected of an audit firm and an audit partner. 

The audit was found to have failed in two areas; The audit of fair value adjustments (FVAs) in relation to loans within the commercial loan book acquired from Britannia, and the audit of FVAs and liabilities under a series of loan notes, which were also acquired from Britannia. 

  1. PwC 

Fine received: £5.1m

PwC received what was the largest fine given out by the FRC at the time, after it fined the firm £5.1m  over misconduct relating to their audit of RSM Tenon for the financial year ending 30 June 2011.

PwC and admitted they had fallen short of expected standards and failed to act in accordance with the ICAEW’s Fundamental Principle of Professional Competence and Due Care. The misconduct included failing to obtain appropriate audit evidence and failing to exercise sufficient professional scepticism.

Nicholas Boden, senior statutory auditor and audit engagement partner, was also fined £114,750 and “severely reprimanded”.

  1. KPMG 

Fine received: £6m 

KPMG was severely reprimanded to the tune £6m over its work on the 2008 and 2009 financial statements of Lloyd’s Syndicate 218. 

According to the FRC, in both years, audit partners mark Taylor and Anthony Hulse, made “insufficient enquiries” about the claims file review process. “Warning signs of deterioration in the syndicate’s claim reserves were not acted upon, and consequently there was insufficient evidence to provide an unqualified audit opinion” the regulator said.

Taylor and Hulse were fined £100,000 each, and Taylor agreed to having his audits reviewed by a second partner until the end of 2020. 

 

  1. PwC

Fine received: £6.5m 

PwC was at the centre of one of the most famous cases in recent memory, and fined £6.5m for its role in the collapse of retailer British Home Stores (BHS). 

Auditor Steve Denison received a 15-year ban from the profession after he recorded only two hours on the company’s audit. Denison was also not informed of then-owner Philip Green’s plan to sell the retail brand, which was a critical point when it came to assessing whether the retail chain could survive without the support of Green’s holding company Taveta. 

The FRC deemed the work performed by Denison was “insufficient to demonstrate the level of supervision that was to be expected.” PwC also launched an internal review of its practices and amended its policies and procedures to ensure that audits of all non-listed high risk or high-profile companies are subject to an engagement quality control review.

 

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