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Tough love is the AADB’s aim

THE ACCOUNTING WATCHDOG may have been given all the fuel it needs to make drastic changes to the way it dishes out fines following a landmark PwC reprimand.

The record fine of £1.4m was handed down to the firm by the Accounting and Actuarial Discipline Board (AADB) for failing to flag up non-segregation of JP Morgan Securities Limited’s client assets for seven years to 2008.

Tom Martin, AADB executive counsel, told Accountancy Age he hopes to get the ball rolling on a consultation which could see larger fines imposed on accountancy firms, as he believes they currently do not serve the public interest.

“We’re thinking of reform at the AADB. This many now be a point to have a debate on financial sanctions on accountants to ensure that it is proportional,” he said.

Although Martin wants to move sooner rather than later, he believes the AADB has to decide quickly if a debate is needed to make sanctions match the public interest better.

The fine on PwC was issued by an independent tribunal following a complaint from the Financial Reporting Council’s regulatory arm the AADB.

It is the largest ever handed out by the AADB and is closer to the figure suggested by PwC for its reprimand – of between £500,000 and £1m, compared to other figures bandied around during the process of up to £44m.

Martin explained the executive counsel had come up with three ways to calculate the value of the fine as a proportion of; the audit fee PwC had charged; the money put at risk by JP Morgan Securities Limited; and the overall profitability of PwC.

One of the executive counsel’s suggestions included using the same calculation that was inflicted on JP Morgan Securities Limited (JPMSL). It was sanctioned 6.9% of its profits after tax in the year its reprimand was made, the same calculation to PwC could equate to as much as £44.3m according to the tribunal documents.

However, the independent tribunal took into consideration that overall profit at PwC was larger than that of its client JPMSL.

The tribunal took into consideration both sides’ arguments on the value of the reprimand but also acknowledged; PwC’s full apology before and during the tribunal as well as a written apology to JP Morgan Securities Limited; the case is one of incompetence and not recklessness on PwC’s behalf; the firm took remedial action before the complaint as soon as it was made aware of the issue such as more stringent training for staff; its co-operation with the investigation; and its agreement on the misconduct.

The fine, issued by the Financial Reporting Council’s disciplinary arm the Accounting and Actuarial Discipline Board (AADB), trumps the £1.2m fine issued to PwC predecessor firm Coopers and Lybrand for its audit work of Robert Maxwell’s businesses.

However, the tribunal indicated that there is a real need for a substantial increase in the level of penalty payable for misconduct largely because in recent times the fees paid by clients to accountancy firms has also dramatically increased. Although it also conceded historically fines on firms have been “too low.”

A spokesman for PwC said: “We are pleased that this matter has now been concluded. We regret that one aspect of our work on the private client money report to the FSA fell beneath our usual high standards.

“When the issue was identified, and before any complaint had arisen, we took action to ensure that staff received additional training in the client monies area.”

PwC will now provide additional training to all staff that work on client money accounts.

The tribunal also raised concerns that no PwC partner was named in relation to the investigation by the AADB executive counsel but added it trusted the investigation and that PwC complied with all investigations and information required from them.

The firm has a month to pay the £1.4m sanction and £22,000 in costs but time will tell if this record-breaking reprimand will be a drop in the ocean compared to future fines.


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