FRC fines reach record high after 24% increase this year

FRC fines reach record high after 24% increase this year

After a string of high profile audit failings, including the collapse of Carillion, the FRC has been under increasing pressure from the government and public to crack down on poor audit work.

FRC fines reach record high after 24% increase this year

The value of fines levied by the Financial Reporting Council (FRC) against auditors has risen 23% to £17.96m in 2017/18, up from £14.59m the previous year, according to research from Thomson Reuters.

After a string of high profile audit failings, including the collapse of Carillion, the FRC has been under increasing pressure from the government and public to crack down on poor audit work.

Brian Peccarelli, Chief Operating Officer, Customer Markets, Thomson Reuters said “commentators had criticised the FRC for levying relatively small penalties that had no deterrent power.”

Earlier this year the watchdog introduced fines up to £10m for “seriously poor audit work” based on recommendations from a report chaired by Sir Christopher Clarke. Clarke said that fines that high might be appropriate in instances of incompetence in audits of a major public company, where the errors were measured in nine figures or more.

He explained: “Fines in single figure millions were only a small fraction of the revenues of members of the Big Four, which dwarf those of other firms.”

“There was a real danger that fines at this level would be regarded as no more than a cost of doing business and have little deterrent effect.”

The FRC levied the maximum possible fine of £10m, discounted to £6.5m, for the first time in June this year, against PwC for its 2014 audit of BHS.

This broke the previous record of highest fine levied, also against PwC, which was £5.1m in August 2017 over the audit of RSM Tenon. KPMG was also slapped with a £3.2m fine for its audit of Quindell.

This series of high profile audit scandals and multimillion pound fines has intensified public scrutiny of auditors and raised questions about how the audit industry can be reformed.

Amid calls for the Big Four firms to be broken up, Peccarelli said that firms are investing substantially in technology such as big data and technology, which allows them to perform more robust audits.

He explained: “Audit firms are able use automation to extract and examine larger amounts of financial data from the business being audited which can then be reviewed for anomalies.”

“This allows audit firms to move away from just testing a small sample of the company’s revenue transactions, thus improving the audit process, making it more transparent with greater controls.”

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