A chartered accountancy firm and one of its partners have been slapped with a hefty fine for “pervasive failures” in the manner in which they conducted an audit of Associated British Engineering, which included shortcomings in the audit of the company’s defined benefit pensions scheme liabilities.
The Financial Reporting Council handed Haysmacintyre a £125,000 fine, and its audit engagement partner David Cox a £17,500 fine, for their improper conduct with respect to ABE and its pension scheme, though “mitigating factors” saw these reduced to payable penalties of £70,000 and £10,000 respectively.
Haysmacintyre and Cox admitted breaches of relevant requirements in six areas: inventory, journal entry testing, revenue recognition and debt recovery, documentation of audit work on going concern, review and supervision of the audit, and the DB scheme.
“The breaches admitted were pervasive, extensive and, in relation to the audit of inventory, serious,” the FRC noted in its report, with the auditors falling short of a number of International Standards on Auditing requirements.
The imposition of the sanctions, and the FRC’s oversight of the extensive programme of remedial measures agreed with the company, should lead to audit quality improvements
Claudia Mortimore, FRC
“In their audit work on inventory, the respondents failed to exercise both sufficient professional scepticism and reasonable professional judgement; they did not obtain sufficient appropriate audit evidence to provide a reasonable basis for the auditor’s opinion,” it continued.
“In two other areas (journal entry testing and DB pension scheme), the respondents failed to conduct the audit so as to obtain sufficient appropriate audit evidence in accordance with ISA 500.”
Auditor failed to properly audit scheme’s assets
The FRC found that with respect to the audit of ABE’s DB scheme liability, which the sponsor identified as £1.35m, Haysmacintyre and Cox’s work “in several respects fell far short of what was required”.
The audit work was “not planned and performed in a manner properly directed to the audit of assets, in this case pension fund investments, including the obtaining of independent confirmation of the assets and the use of appropriate audit procedures in relation to their valuation by management’s actuary,” the FRC’s report stated.
Among the failures identified, Haysmacintyre and Cox did not obtain sufficient evidence to evaluate the work of the ABE management’s actuary, which provided the liability estimate.
They also failed to consider “whether external confirmation procedures relied on by management’s actuary should be performed by [Haysmacintyre and Cox] as substantive audit procedures”, a breach of IAS 330.
Finally, they did not determine whether the management’s own actuary held sufficient and appropriate audit evidence for its assertions about the scheme’s liabilities, which, had it not, they would have had to do work to remediate.
Must do better
The FRC did, however, note that Haysmacintyre “has already undertaken an extensive programme of remedial measures designed to address the shortcomings evident in the audit work in question”.
It further acknowledged “the exceptional level of co-operation given by Haysmacintyre and Cox during the course of the investigation”.
“This has included undertaking a detailed investigation into the failures that led to the breaches and sharing those findings with the FRC,” the report added.
Claudia Mortimore, deputy executive counsel to the FRC, said the fines imposed by the regulator and the measures agreed between it and Haysmacintyre should lead to improvements in the future.
"Haysmacintyre’s audit contained a number of significant failings, including a failure to exercise sufficient professional scepticism, failure to obtain sufficient, appropriate audit evidence, and a failure to document the audit work properly,” she said.
Actuary receives £65,000 fine from FRC due to misconduct
The Financial Reporting Council has issued a £65,000 penalty and imposed a severe reprimand to an actuary, due to misconduct relating to services provided to Coats Group between 2005 and 2012.
“The imposition of the sanctions, and the FRC’s oversight of the extensive programme of remedial measures agreed with the company, should lead to audit quality improvements.”
Haysmacintyre managing partner Jeremy Beard told Pensions Expert: “We acknowledge and regret that aspects of our audit work for this company did not meet the relevant standards in this instance. However, as the FRC has recognised, it did not call into question the truth or fairness of the financial statements.
“The regulator also recognises that we have already undertaken an extensive programme of measures to enhance our audit quality processes.”
