Compliance, guardians of professional scepticism

Published April 27th 2017,  John Byrne, CEO of Corlytics

Accountancy firm Grant Thornton, has been fined £2.3m and severely reprimanded by the Financial Reporting Council (FRC) over failings in its audit of a company called AssetCo, a fire engine manufacturer.

The regulator said Grant Thornton, and its partner with 23 years experience Robert Napper, had admitted a “lack of professional competence and due care”.

This had allowed AssetCo to falsely inflate its value and its share price.

Mr Napper was fined £130,000 and banned from auditing for three years, while the accountancy firm paid £200,000 in additional costs.

But the auditors had been at fault by failing to employ the required level of ‘professional scepticism’.

WHAT PROFESSIONAL SCEPTICISM IS EXPECTED?

Given the weight of this fine, we can expect significant implications that go beyond auditors and actuaries that are providing important financial reports for investors. How will this impact on Financial Conduct Authority certified persons under the Senior Managers Regime, where there are personal consequences for the actions of the business?

The FRC said that the failings of the audit firm, and the now-retired audit partner, in the audit of AssetCo’s accounts were not deliberate or reckless and did not amount to dishonesty. But if they had been more sceptical of the financial information being given to them they would have uncovered the dishonesty.

Given this duty of care, what does this mean for senior persons at FCA regulated firms? What is the new threshold for ‘professional scepticism’?

To answer this, we looked into our global regulatory risk and enforcements database at all the cases involving lifetime bans imposed by the FCA since 2009. 60% OF ALL THE CASES BROUGHT INVOLVED BANS FOR THE HEADS OF COMPLIANCE FUNCTIONS. 

IS COMPLIANCE NOW THE GATEKEEPER FOR “PROFESSIONAL SCEPTICISM”?

If you would like to discuss your risk profile and areas of exposure, call us.

SMR statements of principle to be aware of:

  • Statement of Principle 5

An approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function is organised so that it can be controlled effectively.

  • Statement of Principle 6

An approved person performing an accountable higher management function must exercise due skill, care and diligence in managing the business of the firm for which they are responsible in their accountable function.

  • Statement of Principle 7

An approved person performing an accountable higher management function must take reasonable steps to ensure that the business of the firm for which they are responsible in their accountable function complies with the relevant requirements and standards of the regulatory system.

John Byrne, CEO of Corlytics