Tesco fraud: Questions left unanswered as Financial Reporting Council quietly cans investigation into auditors

The watchdog’s decision may be justified, but it does have form when it comes to swerving tough cases. The new Treasury Committee should now get involved in scrutinising it

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The Independent Online

Terrorist attacks, a general election, tensions rising in the Gulf, there could hardly be a better time to put out news you might not want people to notice. 

Such as, perhaps, the decision by watchdogs not to go ahead with disciplinary action against PricewaterhouseCoopers over its audit work for Tesco when a £326m accounting fraud was taking place.

It’s tough enough to get people interested in auditors, their work, and the oversight of it, at the best of times. Now is anything but that. 

We should pay attention all the same. 

Once again the Financial Reporting Council has been presented with a big, high-profile case against a big, high-profile audit firm, and once again it’s decided not to take it any further. 

The explanation? “The executive counsel to the Financial Reporting Council has concluded that there is not a realistic prospect that a tribunal would make an adverse finding against PwC and certain members in respect of the matters within the scope of the investigation.”

In other words, the FRC didn’t think it could win, so it’s pulled out of the boxing match. 

Now, it may have a point. It’s often said that even the cleverest accountants can still fall prey to a really determined fraudster who knows what he or she is doing. 

Maybe PwC did everything it could, and its super smart audit staff just had the wool pulled over their eyes. It wouldn’t be the first time that had happened. It won’t be the last either.

It is true that Tesco quickly fired its auditors after the scandal had emerged. But, you might very well think that would be the natural response to an event like this. PR and all that. 

It is also true that there is no point wasting time and money on cases where you don’t have any realistic prospect of success. Any half-decent lawyer will tell you that. 

But, and this is the key point, the FRC hasn’t exactly established a reputation as a badass regulator.

It took years, and intense pressure from Andrew Tyrie’s Treasury Committee, for it to take up the cudgels in the case of KPMG’s work on HBOS, for example.  

The committee pointed out that the FRC originally decided not to investigate the audit of HBOS in 2013 (the bank was rescued by Lloyds in 2008), well before the completion of a final report into the events leading up to the bank’s near collapse from other watchdogs involved with it. That decision was branded as “inexplicable” and “unacceptable”. 

So the FRC has form when it comes to ducking big and difficult cases, involving big audit firms and, as such, it really ought to provide more than just a single paragraph to explain why it hasn’t gone any further with this one. 

To be fair, the FRC has shown signs of taking shortcomings at auditors more seriously of late. It has shaken its fist at the profession. It has also launched an independent review of the sanctions it imposes. 

Is this enough? Auditors do vital work but they don’t always do it well. They should be the first line of defence for shareholders when it comes to ensuring the financial statements put out by the companies in which they invest present a true and fair picture of their finances. 

A number of high-profile recent scandals suggests that they aren’t always fulfilling that role effectively and, as such, it is fair to ask whether their regulator is doing enough.

Auditing, and the regulation of it, is not a sexy subject. Nonetheless, it is one we should take seriously. 

As a result, this case should be close to the top of the new Treasury Committee’s to-do list when it sits under a new chairman after the general election.