Wednesday, 22 November 2017

A New Regulatory Approach for the Accounting Industry, But Same Old Results

The second post today is a short follow up from a post earlier in the year that looked at the leniency of the deterrent selected for the accounting industry. In that post we looked at how the SEC and the Financial Reporting Council (FRC) were handing out ‘record fines’ of £5m here or $6 million there, something which onlookers noted was ‘less than half a day’s work’ for these top-four Auditors. Therefore, you can imagine this author’s delight when reading the headline in the Financial Times yesterday that a ‘review recommends larger fines for accountancy firms’; yet, regular readers of Financial Regulation Matters know that there was no such delight, because the rest of the article could have been written without one having read it.

Obviously, the article goes on to confirm that, as suspected, the increase in fines was not really worthy of a headline, if the increase even goes ahead at all. In the report commissioned by the FRC and led by for Court of Appeal Judge Christopher Clarke, it was mentioned that as a starting point the firms should not be able to profit from wrongdoing (although they stated that identifying that profit may be difficult owing to the nature of the business of auditing) and that ultimately the ability to fine firms should be significantly increased. The article in the FT makes the obvious comparison between largest penalties attributed by the FRC and the FCA, with the FRC’s being £5.1 million and the FCA’s being £284 million – in reality, the FCA’s level of fines also needs to be addressed. The most startling sentence in the article – ‘the most controversial measure proposed by the review would enable the regulator to fine large accounting firms by more than £10m’ – is perhaps indicative of where the regulatory framework is up to. Whilst Clarke rightly notes that the smaller fines like we have now are probably just recognised as ‘the cost of doing business’, it is unlikely that fines of £10 million will fare much differently, something with Professor Ramanna calls the ‘800-pound gorilla’ in the room.

Unfortunately, if we were to look at actions rather than words, then this report is particularly poor. Not to judge Clarke’s intent, but looking at the actions paints a picture whereby the capability of a regulator to control an industry which is inexplicably linked to corporate wrongdoing is called into question, and the result of extensive investigation is that they should raise their fines by a total of £5 million at a time, against companies that post revenues in the billions and profits in the hundreds of millions. Right now is the time for regulators to work via actions rather than statements, but unfortunately this report does exactly the opposite, and the auditing industry will have taken notice – what message would then have received? Business as usual….

Keywords – Accounting, Auditing, Financial Regulation, Financial Reporting Council, Fines, Crime, White Collar Crime, @finregmatters

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