Accounting firms are at the heart of corruption in the UK

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“Accounting firms have been performing audits for over a century, but still fall short of providing solid, honest audits.”

Prem Sikka is Emeritus Professor of Accountancy at the University of Essex and the University of Sheffield, Labor Member of the House of Lords and Editor of Left Foot Forward..

Corruption is institutionalized in the UK. The financial industry routinely defrauds people by mis-selling financial products, money laundering and falsification of customer signatures. The corporate sector has its own private police force in the form of auditing firms which are supposed to act as watchdogs highlighting financial irregularities. Accounting firms don’t bite the hand that feeds them, and it’s hard to remember the wrongdoings they uncovered. Worse still, they engage in fraud and improper practices themselves.

Large accounting firms dominate the state-guaranteed external audit and insolvency markets. Fees are guaranteed even though the regulator, the Financial Reporting Council (FRC), claims that 29% of audits issued by the seven largest audit firms – BDO, Deloitte, Ernst & Young (EY), Grant Thornton, KPMG, Mazars and PricewaterhouseCoopers (PwC) – do not meet basic standards.

Accounting firms have been performing audits for over a century, but still fall short of providing solid, honest audits. Accounting scandals at BHS, Carillion, Thomas Cook, Patisserie Valerie, London Capital and Finance, Quindell, Autonomy, Rolls Royce, BT and Tesco provide insight into audit failures. Small regulatory fines have emboldened companies.

Following the collapse in January 2018 of Chime, a parliamentary report highlighted KPMG’s audit failures and also criticized PwC, Deloitte and Ernst & Young who acted as advisers to the firm. Together, they collected nearly £72m fee. A detailed investigation has been promised by the FRC and a report has yet to be released.

For audit quality assessments, FRC inspectors also review a sample of audits performed by firms. They chose to review the 2014 and 2016 audit files relating to Carillion. KPMG has now admitted to providing falsified documents to FRC audit quality inspectors for Carillion’s 2016 audit. These included fake spreadsheets and meeting minutes, manufactured months after the audits. A junior staff member is blamed by KPMG partners, which raises further questions about staff supervision, partner reviews, the prevalence of irregular practices and the corrosive organizational culture.

KPMG is no stranger to irregular practices. In August 2021, the firm was a fine of £13 million. His insolvency partner pushed silent night, who was a client of the accounting firm, into insolvency, so that the private equity group HIG, the client he really wanted to cultivate, could buy the company from the administration by getting rid of the pension plan benefits of the 1,200 employees of Silentnight. KPMG partner lied to Pension Regulator and Pension Protection Fund. The fine swelled the coffers of the Institute of Chartered Accountants of England and Wales, which cleared the cheating and lying partner.

In 2005, US authorities fined KPMG $456 million after the company admitted “criminal actto allow its customers to avoid taxes. At the time, it was the largest criminal case ever filed in the United States. Several members of the company’s personnel went to jail, but with the help of his political friends, he stayed in business.

The US revelations have not convinced the UK to investigate the company or the tax avoidance industry. In stark contrast, it confers royal honors about partners of KPMG and other major accounting firms. In 2012, KPMG’s tax partner became chairman of HMRC, the UK tax authority.

KPMG is not alone in having harmful practices. Following a parliamentary inquiry into the collapse of BHS and failed audits, the FRC reviewed audits conducted by PwC. his report noted that for the final BHS audit, the audit partner only spent two hours on the job. For all intents and purposes, the audit team was led by a junior person with only one year of post-qualification experience. Most parts of the financial statements have not been properly audited. To appease BHS directors, the audit partner also backdated the audit reports.

Audits have become worthless as tampering with audit work is normalized. Auditing firms expect staff to get the job done in less time. staff respond tight hourly budgets falsifying the audit work, i.e. claiming that the required work has been performed when this is not the case.

The hand of the big accounting firms is only too visible in the tax dodges revealed by the paradise papers, the Panamanian papers, the Luxembourg papers and many other leaks. Yet there is no regulatory investigation. Numerous court cases said tax avoidance schemes marketed by major UK-based accountancy firms were illegal. Yet none of the big companies are being investigated, prosecuted or fined. Large companies continue to receive government contracts and advise government departments.

Large accounting firms are a major site of contemporary corruption. They loot public funds and suffer no punishment. Current forms of auditing by accounting firms are reassuring but offer little value. Too many accounting firms engage in fraudulent and irregular practices to enrich their partners. Their power must be reduced. They need to be broken. Their partners must be made personally responsible for the damage they inflict. Therefore, the liability protections afforded to them by law of limited liability companies (LLP) must be removed. Audits of large companies must be carried out by an independent public body. Audit files should be publicly available.

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