AADB sanctions will prompt wistful thinking

by Richard Crump

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23 Apr 2012

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WHEN THE accounting watchdog slapped PwC with a record fine for its audit work at JP Morgan, I argued that the penalty was both fair and inadequate at the same time.

The £1.4m fine levied by the Financial Reporting Council's disciplinary arm, the Accounting and Actuarial Discipline Board (AADB) for PwC failing to flag up non-segregation of JP Morgan Securities Limited's(JPMSL) client assets for seven years to 2008 was fair, based on the regulator's guidelines but inadequate given that PwC was still able to come out £5.1m up.

At the time, I wrote that "PwC should be thankful that the AADB has yet to reform its guidelines for financial sanctions on accountants".

That is all set to change after the AADB finally announced plans to get tough on the audit market by imposing tougher sanctions on firms' dereliction of duty.

The guidance includes proposals for the imposition of "proportionate sanctions that will have an appropriate and credible deterrent effect." Firms are going to face much tougher penalties than in the past.

Taking the JPMSL fine as an example, a £1.4m fine for a company that raked in £2.46bn from all of its activities for the year to June 30, 2011, could hardly be described as a credible deterrent.

The AADB could now call on firms to be fined a percentage of annual turnover and auditors will be left with little time to make sure they are up to scratch. The watchdog is moving quickly to put guidance in place by the end of the year.

More worrying is that fines imposed under the new guidance will apply to investigations started under the current regime but are concluded after its date of inception.

This could be bad news for PwC. The Big Four firm is facing investigations by the watchdog into its auditing of Cattles, the failed sub-prime lender, and Barclays Capital. The AADB is also expected to open a full inquiry into PwC's auditing of RSM Tenon.

It may be that PwC avoids any sanction for its work at Cattles and Barclays, and the RSM Tenon investigation may fail to materialise. After all, an investigation is just that. PwC will be defending its work and there is no reason to suspect the firm is guilty of any misconduct.

However, sanctions under the new guidelines could work like the Financial Services Authority which fined JPMSL £33.2m, equivalent to 1% of the average amount of client assets at risk over the eight years in question.

A similar reprimand based on the proportion of profits after tax of PwC would have been £44.3m - if this method is adopted and the firm was found guilty on all three cases, it could find itself on the hook for significant liabilities. 

The Big Four may look back wistfully at the days when a record fine could be represented by the paltry sum of £1.4m.

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