Audit reform is boring. That was the view of Downing Street aides who wanted to pep up the legislative agenda with more voter-friendly measures. Yet accounting scandals are hardly dull. They highlight the need for auditors to clean up their act — as do financial penalties that are finally getting big enough to matter.
On Tuesday, KPMG received its biggest ever UK fine. The £14.4mn penalty, levied for misleading the regulator, relates to cover-ups by its staff during routine inspections of two audits. It matters as much that audit partner Peter Meehan received a fine of £250,000. In the past, the personal fines of a few thousand pounds handed out by incestuous industry tribunals were too low to deter rule-bending accountants.
One KPMG case concerned London-listed IT company Regenersis. The other was outsourcer Carillion, which subsequently imploded with liabilities of £7bn and only £29mn of cash. During inspections, KPMG auditors created minutes and other documents, which they passed off as having been produced ahead of the accounts sign-off.
The Financial Reporting Council is still investigating the substance of the Carillion audit. The liquidators of the construction company and the Official Receiver are separately suing KPMG for £1.3bn. KPMG does not expect to pay anything like that. The partnership’s provisions in respect of professional claims and regulatory matters went up by roughly a half in 2021 to £135mn.
It is unhelpful that many of the accountancy firms’ fines, including the latest, are paid to their own professional institutes. But that will change, with the government increasingly likely to benefit.
The big question is whether this fine — and those of other recent cases including Rolls-Royce — relate to isolated examples of bad behaviour or a more systemic problem. A rash of accounting scandals points to the latter.
However, the watchdog found that 84 per cent of audits inspected over the past year required no more than limited improvements. That is promising but not yet a trend.
KPMG — and its rivals — have a lot to prove when it comes to professional standards. A series of scandals involving staff cheating on professional exams in the US, Canada and Australia are disturbing.
The latest KPMG fine shows the importance of individuals challenging improper practices as they happen. Long-mooted UK audit reforms will not become law until 2023-24 at the earliest. The culture of accountancy firms needs to improve now.
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