Don’t delay: contracting out of the prevention principle
Last week, the Financial Reporting Council (FRC) announced that it had sanctioned PriceWaterhouseCoopers (PwC), and its audit partner Steve Denison, in relation to the 2014 audits of BHS and the Taveta Group (Taveta), following an investigation under the FRC’s Accountancy Scheme.
The predicament of BHS is well known: the chain store collapsed in 2016, with a loss of several thousand jobs and whilst harbouring an extremely large pension deficit. Mr Denison signed off the BHS accounts as a growing concern, meaning that the company was financially viable, just days before it was sold for £1.
What is notable about the FRC’s decision is the level of fine imposed, particularly against PwC. As part of a settlement agreement, PwC was fined £10 million (reduced to £6.5 million due to early settlement); Mr Denison was also fined a substantial sum: £500,000 (reduced to £325,000 due to early settlement). Both received a severe reprimand, significant conditions were placed upon PwC and Mr Denison was banned from performing audit work for a period of 15 years; a sanction which is significantly career-limiting.
Those who are involved in FRC work will have noted a steady increase in the amount of fines handed down by the regulator in recent times. Over the past year or so, fines against firms have often been in the sum of several million pounds; a large dent in any organisation’s annual accounts.
The imposition of a fine in the sum of £10 million follows the publishing of revised sanctions guidance by the FRC, which implemented the findings of an independent review of sanctions, undertaken in 2017. The review culminated in a report of October 2017, which made several key recommendations including that there should be an increase in fines to £10 million or more for seriously poor audit work by a ‘Big 4’ firm. This case demonstrates that the FRC is not afraid to follow that guidance.
The ‘Big 4’ has been under significant scrutiny in recent years in relation to audit work carried out on behalf of a number of large listed companies. The threat of fines pertaining to any failures in these audits is now substantial.
It used to be the case that firms sought to protect themselves against the threat of a significant financial compensation order, if a negligence claim against them was successful. However, perhaps this is no longer the most prevalent threat to their balance sheet. Large audit firms, and their audit partners, will no doubt be considering carefully how best to make provision for such large fines, should one of their audits be the next to face public scrutiny.
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