PwC may have just been dealt the largest fine ever handed out by the Financial Reporting Council’s disciplinary arm, the Accounting and Actuarial Discipline Board (AADB), over its work at JP Morgan, but the £1.4m fine is miniscule compared to the other figures bandied around during the process of up to £44m.
So was the fine excessive, fair or inadequate? And how did £44m become £1.4m?
The fine was levied for PwC failing to flag up non-segregation of JP Morgan Securities Limited’s (JPSML) client assets for seven years to 2008, which PwC accepted had “fallen short of the standards reasonably to be expected of members and member firms”.
The FSA fined JPMSL £33.2m for the breach, equivalent to 1% of the average amount of client assets at risk over the eight years in question. A similar proportion of the profits after tax of PwC would have been £44.3m. If this were not accepted, AADB’s counsel, Simon Browne-Williamson, urged the tribunal to adopt a similar tack suggesting it might consider sums such as the £6.5m fees JPMSL paid to PwC during the period in question.
Both arguments relied heavily on the fact that the overall profit of PwC was larger than that of its client. However, the AADB accepted that the relative profits of the client and the auditor are not appropriate measures of the penalty. Although this does raise the question whether the increases in the fees paid by the likes of JP Morgan to firms such as PwC need a hike in the penalties payable for misconduct of the type in question.
Tim Dutton of law firm Herbert Smith and counsel to PwC, on the other hand, suggested that the appropriate fine should be between £500,000 and £1m and should fall at the lower end of the range. Previously, the largest penalty imposed by the JDS tribunal – the forerunner of the AADB – had been £1.2m in the case of the auditors of the companies connected with Robert Maxwell.
That is quite a startling disparity and leaves the AADB in a quandary. Without concrete guidelines in place the AADB can only base its sanctions on what has gone before – such as the Maxwell case. But clearly there needs to be some sort of review by the AADB. After all, a fine should be levied as a deterrent and it is questionable whether a £1.4m fine will make much impact to a firm that reported £2.3bn in fee income for 2011.
So the fine was both fair and inadequate at the same time. Fair based on the current guidelines but inadequate given that when you deduct the fine from the fees paid by JPMSL, PwC still comes out £5.1m up.
While a fine of £44m was never going to become a reality, PwC should be thankful that the AADB has yet to reform its guidelines for financial sanctions on accountants.