The top accounting watchdog in the UK has called for accountants to be held to higher standards when auditing companies, after a probe into KMPG's audits of HBOS in the run-up to the lender's collapse failed to find the accountant guilty of misconduct.
Stephen Haddrill, chief executive of the Financial Reporting Council (FRC), has claimed that the current standard which a tribunal must apply to find whether accountants should be penalised is too high a hurdle.
In a letter to the Treasury Select Committee chair Nicky Morgan, and in an FRC report on the KPMG-HBOS investigatio, Haddrill called on parliament to support changes proposed by the FRC and – if necessary – legislate to make them binding.
“This long-awaited report rightly acknowledges that the FRC should have been more ‘proactive’ in investigating KMPG’s audit of HBOS. It was only through pressure from the Treasury Committee that the FRC decided to act," said Morgan.
“As Mr Haddrill says, the report sets out the lessons that the FRC has ‘learnt for the future’. We will be calling the FRC to give evidence in the New Year to discuss whether their conclusions go far enough.”
Haddrill explained that in order for KPMG to have faced any penalties, “a tribunal would need to find that no reasonable auditor or audit firm would have acted in the way that KPMG did, and this was not the case in relation to HBOS”.
He added that the FRC had modified this test in relation to straight audit cases, so the watchdog could chase "breaches which may not have amounted to misconduct but which nonetheless should be pursued".
But the new and easier-to-prove test does not apply to accountants who are members of the professional accountancy bodies, since the bodies must agree to any changes.
“It is our view that accountants in public interest roles should be subject to a similar threshold of accountability as auditors now are, to protect the public interest,” Haddrill said.
The FRC did note that it had modified some of its own processes since the HBOS case, such as undertaking investigations in parallel with other regulators rather than waiting for them to finish.
It also said it would be reviewing its own governance, as it noted concerns have been raised that it employs too many people from the major accounting firms it regulates.
The FRC said it would be “expanding the diversity, range of skills and experience” on its board and committees.