Top Accounting Outrages in 2018

A summary of the cases of financial outrages, accounting fraud and corporate fraud which fascinated us last year and their consequences.

Financial crises are as old as the financial industry itself, but the number of high-profile corporate collapses in 2018, associated with a threesome of major reviews into the audit industry, are engaging the issue of accounting outrages firmly in the spotlight. All are calculated to bring greater clearness to the industry, define more obviously what is expected of auditors and how to avoid a potential clash of interests as well as trying to prevent additional accounting fraud, amongst much else.

The first of these two both unconfined their findings on the industry in December last year. Legal & General chairman Sir John Kingman’s review of the Financial Reporting Council (FRC), the self-governing regulator of auditors, accountants and actuaries, had severe words to say about its subject, calling for it to be tussled altogether and replaced by the Audit, Reporting and Governance Authority (ARGA). The Government has accepted these proposals. “Having spent most of its life in unimportance,” he said, “the FRC now finds itself subject to tough and determined criticism unparalleled spotlight.”

It had taken an “excessively consensual” approach to its controlling work and needed to be rebuilt from the ground up, not smallest because it had grave problems about how it enlisted top staff.

Funding needs to change: currently the FRC is partially dependent on a voluntary levy from audit firms, potentially execution it unwilling to “bite the hand that feeds it”; ARGA should have legal recognition and funding. Further recommendations were for a “duty of alert” for auditors to report “feasibility of other serious concerns”, and for the regulator to have increased powers such as making references to shareholders to cut surpluses or fire senior staff where they felt it was warranted.

Rising concerns

In the wake of rising concerns, the Department of Business, Energy and Industrial Strategy (BEIS) has also launched its own review into the sector, while its Select Committee is now looking into the execution of the CMA reports. The latter outlines serious concerns about struggle and suggests changes to regulation to improve the sector.

Chief issues include the fact that corporations choose their own auditors, which means they go for those with a “cultural fit”. Another problem was limited special, with the Big Four Audit firms conducting 97 per cent of the audits. There were doubts that the focus of quality could be cooperated by the fact that 75 per cent of the Big Four’s revenue came from other services including consulting.

The ‘expectation gap’

The CMA suggested regulation to separate audit from consulting services, with the two split into separate functioning entities with separate management, accounts and wage.

It also suggested the introduction of measures to considerably increase the accountability of those leading audit committees in firms and the imposition of a “joint audit” government, which would include firms outside the Big Four having a role in auditing the UK’s biggest companies.