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What do you think?
Are corporate fines punishment or deterrent? In the UK’s accounting industry the answer is neither. A new report suggests higher charges will make a difference. But meting out more draconian penalties will not improve audit quality unless someone does a better job of defining what quality means.
Accounting firms will have heard the drumbeats for some time. High-profile controversies are piling up and fines elsewhere are rising. This year the US auditing watchdog fined Deloitte’s Brazilian arm a record $8m for falsifying audit reports.
The UK’s big four — Deloitte, PwC, EY and KPMG — are being told to expect fines of more than £10m for “seriously poor” audit work. Sanctions imposed by the Financial Reporting Council look puny when held up against their revenues. The largest fine issued to date — £5m imposed on PwC for “extensive misconduct” — equates to 0.02 per cent of its global revenue in the past financial year.
Pressure is on the Financial Reporting Council to toughen up, too, after it has repeatedly come away from lengthy investigations empty-handed. A bumper year of fines could be on the horizon. But raising the maximum fine above £10m will still look small beer compared with other industries. The Financial Reporting Council’s record £15m in fines this year falls short of the single £20m penalty imposed on Thames Water by Ofwat for dumping sewage, and is a fraction of the £225m fines levied by the Financial Conduct Authority on various miscreants.
The UK’s financial watchdog may claim its fines have bettered the City’s culture but former head Martin Wheatley has said that individuals should also be held to account. Imposing fines is, of course, much easier than mounting a successful criminal prosecution.
Higher penalties also do not address the domination by the big four, or the question of what exactly their transgressions are. Investors want auditors to do a better job investigating fiddled accounts. Auditors argue such policing is not their job. Against that backdrop, doubling fines will change very little.
The Lex team is interested in hearing more from readers. Will £10m fines alter the behaviour of the big four? Should the FRC do something else? Please tell us what you think in the comments section below.