Scandal watchdog comes off the leash

With the dust now beginning to settle after the Joint Disciplinary Scheme imposed a £3.5m penalty on PricewaterhouseCoopers over the Maxwell scandal, the watchdog body appears to have retreated once more into its kennel.

But, as partners at some top firms are uncomfortably aware, this does not necessarily mean it is resting.

Investigations are proceeding into the role accountants played in a number of big-name corporate scandals, and another round of uncomfortable headlines looms for the profession later this year.

Those involved will draw little comfort from the JDS annual report released last week, which reads like a mini catalogue of the UK’s most infamous corporate scandals.

Appearing alongside Mr Maxwell’s corrupt business empire is Astra, the defence company involved in the arms-to-Iraq affair, and two former banks, Barings and Bank of Credit and Commerce International, both of which collapsed in a web of intrigue and scandal that sent shock waves around the financial world.

Accountants tend to find themselves in the middle of any corporate scandal, either as an auditor or as an employee of the business involved. The JDS investigates both and, if it thinks there has been professional misconduct – or in its own words, work or conduct that ‘has fallen below the standard reasonably to be expected of chartered accountants’ – it puts the case to an independent Joint Disciplinary Tribunal.

It is this tribunal, chaired by a senior lawyer unconnected to either the JDS or those under inquiry, which decides guilt or innocence and imposes penalties.

Barings: next case on the block

The next case to hit the headlines could be Barings.

As Nick Leeson, the trader whose actions bought down the bank, prepares for his release after a lengthy stretch in a Singapore jail cell, two PricewaterhouseCoopers partners will be defending their audit of the bank before a JDS tribunal.

The JDS is also considering taking action against another chartered accountant formerly employed in a senior position at Barings, recently disqualified as a director.

Investigations continue into the role of Stoy Hayward in the collapse of Polly Peck, and into a number of other cases involving accountants in both business and practice.

Arthur Andersen, for example, is under investigation over its audit of Wickes, the DIY retailer, where staff were found to have colluded with suppliers to inflate sales figures and inflate their bonuses. Chartered accountants employed by the company are also being investigated, although this part of the investigation is being delayed while the Serious Fraud Office investigates.

PricewaterhouseCoopers could find itself in the hot seat once again as the JDS restarts an investigation into the BCCI collapse, which was stayed on the orders of the Court of Appeal in 1993.

These cases highlight one of the major challenges faced by the JDS in running its investigations and which it raises in its annual report. It states: ‘In the past, several firms have sought to stay investigations by the JDS because of the pressure on the firms to deal with other proceedings and investigations arising from some major fraud.’

The JDS goes on to express its support of an initiative by the Lord Chancellor to reduce the multiplicity of such proceedings, which could include civil proceedings, Serious Fraud Office investigations and a multiplicity of regulatory actions.

Such problems, however, could become less constraining when the JDS is replaced by a new Investigation and Discipline Board next year – part of the new independent regulatory regime being imposed on the profession by the government.

Details have yet to emerge, but the JDS says the new board will have the power to share its own information and evidence with other regulators. Chris Dickson, JDS executive counsel, says this will be a big boost for the new body.

‘At the moment, the JDS is not allowed to share information it obtains with other regulators, whereas we very much rely on them for information. The new power will allow a much better relationship with them.’

Dickson’s fate at IDB unknown

It is not yet known whether the new IDB, which, like the new profession’s new regulatory structure announced by trade minister Ian McCartney last week, will have a 60% non-accountant majority and be overseen by 100% non-accountant ‘foundation’, will want to keep Dickson on, or indeed whether he will want to stay.

But there will be plenty to keep the former Serious Fraud Office lawyer busy for the immediate future. The JDS will continue to exist in parallel with the new board while existing cases are dealt with.

Although its power to share information with other regulators is likely to assist the JDS in its work, it is also probable that the IDB will have other powers which will make it a more powerful beast than the JDS.

According to the trade department’s consultation document published last year on the new structure, the IDB will have the power to take on a case without referral by one of the professional accountancy bodies, which the JDS cannot now do.

Details have yet to emerge, but the DTI last week said the new regime, and in particular the IDB, would cover the investigation and prosecution of disciplinary cases in which there is a ‘public interest’.

This will be backed up by another body in the new regime, the Review Panel, which will ‘have powers to scrutinise both the “public interest” regulatory regimes and monitoring and disciplinary regime which will remain with the professional bodies’.

The government clearly sees the new regime as a demonstration of its regulatory muscle. The involvement of a large number of non-accountants in the regime could also lead to a greater amount of disciplinary action being taken against accountancy firms.

Accountants, very much aware of this, have already argued that the new regime will lead to auditors becoming ‘whipping boys’ when corporate wrongdoing surfaces. Indeed, many argue they already are.

So far, no-one has questioned the quality of work carried out by the JDS, but a common complaint is that it is kept on too short a leash and lacks sufficient powers to be a truly effective watchdog.

This should change, as the signs are that the new IDB will be given a much longer leash and greater powers to sniff around allegations of professional shortcomings by accountants. Those who find themselves near its kennel next year should tread with greater caution.


Maxwell: Coopers & Lybrand was hit with a £3.5m penalty this year over ‘shortcomings’ in its dealing with the Maxwell (above) companies.

Barings: Two former Coopers partners must defend their audit of the failed bank (above, left) at a tribunal.

Wickes: Staff at the DIY retailer (above, right) colluded with suppliers to inflate sales figures and bonuses. Auditor Arthur Andersen faces investigation.

BCCI: A team to investigate Price Waterhouse’s role in the collapse of the bank is being constituted.

Polly Peck: The inquiry into Stoy Hayward’s audit of the collapsed group Polly Peck is expected to conclude this year.

Astra Holdings: Stoy Hayward has already been served a £750,000 penalty in relation to its audit work for the arms-to-Iraq defence company. Two Astra accountants could still face action.

Atlantic Computers: A tribunal has been formed to hear complaints against three company chartered accountants.

Resort Hotels: The inquiry into former auditor Coopers and Resort employees in connection with a right issue continues.

Queens Moat Houses: Auditor Bird Luckin and accountant directors within the company are being investigated.

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