FRC preliminary enquiries into HBOS audits debate: In an exclusive op-ed for The Accountant, professor Prem Sikka argues that the UK accounting regulator should follow the model of its counterpart in the transport sector, the Air Accidents Investigation Branch
Is the UK’s accounting regulator, the Financial Reporting Council (FRC), fit for purpose? This question is being given a renewed visibility by interventions of the House of Commons Treasury Committee. Its chairman Andrew Tyrie is pressing the FRC for a speedy investigation of the audits of HBOS, a banking group created in 2001 with the merger of Halifax plc and Bank of Scotland.
HBOS was audited by KPMG. In early 2008, HBOS was absorbed into the Lloyds Banking Group. Later that year it received a government cash injection of £37 billion ($53bn). Eventually, Lloyds had to be bailed out too. In November 2015, a report published by the Bank of England was highly critical of HBOS business model, management and accounts. The report expected the FRC to probe the HBOS audits, something the FRC had not previously been keen to do. Indeed, the FRC has not been keen to examine real/alleged audit failures at banks, all performed by the Big four firms.
In January 2016, under pressure from the Treasury Committee, the FRC announced that it would make "preliminary enquiries" into the 2007 financial statements published by HBOS. This is hardly adequate and ignores 2008, a period of massive upheavals. Some eight years after the crash, the FRC is only talking about a "preliminary enquiry".
The FRC has a poor record of conducting robust and timely investigations. Its investigation of audit failures at MG Rover, audited by Deloitte & Touche, was announced in August 2005. The outcome was not finalised until April 2015 and on appeal the fine on auditors was reduced to just £3 million. The derisory nature of the fine is evident as between 2000 and 2005 Deloitte received £30.7m in audit and non-audit fees.
The regulatory wheels turn slowly at the FRC. An investigation into the financial statements of iSoft Group Plc for the years 2003-2005 was announced in October 2006. Interim reports appeared in 2010 and 2011 and the matter being finalised in August 2013. Or consider the case of Cattles Plc, where in July 2009; the FRC announced an investigation into the role of PricewaterhouseCoopers in the company’s accounts for 2007 and 2008. A report is still awaited. No doubt, the FRC would make excuses claiming that it could not do anything because of ongoing litigation, which was settled in October 2015 with an out-of-court agreement. However, this did not preclude the Financial Services Authority from concluding in 2012 that Cattles’ financial statement contained highly misleading arrears, impairment and profit figures.
Despite public hearings by the House of Commons Public Accounts Committee, the FRC has shown no inclination to deal with the involvement of major accountancy firms in tax avoidance. On a number of occasions, the courts have declared the schemes devised and marked by the firms to be unlawful. Yet no action has been taken. No accountancy firm has been investigated, disciplined or fined.
The case of Iliffe News and Media Ltd & Ors v Revenue & Customs [2012] UKFTT 696 (TC) drew attention to the fact that auditors, a big four firm, designed a tax avoidance scheme to reduce the company’s tax bill and, to quote the court judgment, "would significantly lessen the transparency of reported results". The scheme was declared to be unlawful, but no action has been taken against the auditors.
The FRC’s regulatory practices are at odds with other sectors which deliver robust and timely investigations. A good example is the Air Accidents Investigation Branch (AAIB) operated by the Department of Transport. It investigates air accidents and is independent from the airline industry. It does not promote the industry and does not regard its standards or rules as sacrosanct. Rather its main aim is enhance public safety and in that process it criticises the prevailing standards and makes recommendations for prevention of accidents.
In contracts, the FRC is too close to big corporations and accountancy firms. Its board, committees and various working parties are populated by individuals from the very organisations which may need to be scrutinised. No doubt, the need to serve the public interest is firmly etched on their minds, but their conception of public interest cannot easily be divorced from their business interests.
The FRC certainly does not deliver timely reports. The banking crash has problematised the claims that the accounting and auditing standards are of high quality. However, they still continue to be used as benchmarks for making judgements about good practices. Unlike the AAIB, the FRC reports rarely find any fault with the prevailing standards. This is not that surprising because the FRC itself has created the accounting and auditing standards implicated in the wreckage of corporate scandals. It is hardly going to blame itself and recommend the demise of its rulemaking powers.
The FRC has outlived its usefulness and needs to be replaced by a regulator who is independent of the vested interests and can deliver robust and speedy investigations.
Prem Sikka is professor of accounting at the University of Essex
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