U.K. Regulator Criticizes Audit Firms Over Exam Cheating

The U.K.’s audit and accounting regulator is intensifying its scrutiny of big audit firms and what they are doing to prevent cheating on professional exams, a move that comes after the U.S. Securities and Exchange Commission in late June handed Ernst & Young a $100 million fine.

The Financial Reporting Council in a July 5 letter said it is “deeply concerned” about audit professionals cheating on external professional exams and internal assessments.

The letter, published Friday by the FRC, was sent to seven audit firms, including Big Four firms Deloitte, Ernst & Young, KPMG LLP and PricewaterhouseCoopers LLP, as well as BDO, Grant Thornton LLP and Mazars. It calls on the chief executives of the firms to detail the measures they have in place to prevent and detect misconduct around tests.

The pressure from the FRC follows regulatory action by other global regulators for exam cheating at KPMG, PwC and EY.

“The FRC is deeply concerned about these events and the potential impact on U.K. audit firms,”

Sarah Rapson,

the FRC’s executive director for supervision, said in the letter. The exam misconduct has “clear implications” for compliance with professional standards that call on audit firms and professionals to act with integrity, she added.

Supervisors from the FRC have been in talks with the seven audit firms about the controls in place to prevent test misconduct, the letter said. The audit watchdog is now asking the firms to formally lay out those measures on or before July 22.

The SEC last month charged EY for cheating by some auditors on required ethics exams. EY admitted that over multiple years, a “significant number” of audit professionals cheated on the ethics component of Certified Public Accountant exams and on continuing professional education courses, according to the SEC. The firm also acknowledged that it had failed to report test-related misbehavior when asked by regulators.

Meanwhile, PwC’s Canadian entity was fined by regulators in February for improper exam sharing between 2016 and 2020 by more than 1,200 firm professionals. This resulted in a fine in February of up to $200,000 from the Canadian Public Accountability Board and a $750,000 penalty from the U.S. Public Company Accounting Oversight Board. The PCAOB additionally imposed a $450,000 penalty last year against KPMG Australia for widespread cheating on internal training tests.

KPMG in 2019 agreed to pay $50 million to settle allegations that auditors had cheated on internal training exams and that the firm had altered past audit work after receiving stolen information about PCAOB inspections. Five former KPMG officials were charged by the SEC in 2018 with using leaked confidential PCAOB information in an effort to improve inspection results for the firm.

The PCAOB in April fined KPMG’s former head of U.S. audit business—Scott Marcello—$100,000, the largest monetary penalty imposed on an individual in a settled case. Mr. Marcello was terminated in 2017 over leaking confidential information.

In a separate letter to the CEOs of the U.K.’s professional accountancy bodies, Ms. Rapson said that the “severity and repeating nature of these issues” has prompted the FRC to seek a deep understanding of the controls in place to prevent exam misconduct. The FRC has oversight over six chartered accountancy bodies, including the Association of Chartered Certified Accountants, the Chartered Accountants Ireland and the Chartered Institute of Management Accountants.

Regulators and companies expect honesty and integrity from audit firms and auditors, said

Marc Moore,

chair of corporate and financial law at the University College London’s law school. “These are the very values thrown into question by this,” he added, referring to exam misconduct.

The FRC’s letter is a step in the right direction, but questions remain about how effective it will be, Mr. Moore said. “Any response [the firms] provide will give assurance about future practices,” Mr. Moore said. “But whether it really mitigates worries about the integrity of audits is questionable” because it doesn’t provide reassurances about past practices, he added.

KPMG U.K. said it makes clear what is expected from firm professionals and that it would fully investigate misconduct when necessary. Deloitte U.K. said it will respond to the FRC and that it takes professional and ethical obligations seriously. EY and PwC pointed to the comments they made when the fines against them were announced, which noted steps taken by the firms in response to the regulators’ findings, and declined to comment further.

Mazars and the FRC declined to comment, while the other firms that received the letter did not immediately respond. Deloitte is a sponsor of CFO Journal.

Write to Jennifer Williams-Alvarez at [email protected]

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