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Tougher action must be taken against those who mislead auditors

Author: ICAEW Insights

Published: 24 Nov 2021

Martyn Jones, Past ICAEW President, puts forward his case for tougher sanctions for those who mislead UK auditors.

Successful enforcement of sections 499 to 501 of the Companies Act 2006 is about as dead as the Norwegian Blue Parrot from the famous Monty Python sketch. This is a shame, as these sections – which cover the rights of auditors to information and the related offences for knowingly or recklessly making statements (oral or written) to an auditor that are misleading, false or deceptive – are essential to support high-quality financial reporting and auditing.

Looking back at recent scandals, one has to ask why there is such an absence of successful cases brought under this offence. Could it be that the audit policymakers are themselves just nailed to a perch or merely resting? No. I would suggest that this is an area of law that was flawed from the very start, and one the UK Government must tackle to demonstrate it is taking the issue of restoring trust in audit and corporate governance seriously. 

In my opinion, the penalties are woefully inadequate. The maximum penalty is imprisonment for a term not exceeding two years on conviction on indictment or a fine (or both), and on summary conviction lower penalties. In other words, it is probably not viewed by the prosecuting authorities as sufficient an offence to take forward following an egregious accounting scandal. However, the damage done to public trust that can arise from such a scandal and, in particular from misleading an auditor, can be immense.

To put this in context, the maximum penalty for shoplifting goods worth more than £200 is seven years in jail. This is not to demean the importance of deterring shoplifting, but providing false statements to auditors needs to be treated very seriously. It is a gateway to a loss of trust in the UK as a place to invest and to list a company at a time when the country needs to be as competitive as possible. 

An argument is sometimes made that it is hard to take action against those that mislead auditors. This just does not stack up. The US Securities and Exchange Commission actively and successfully pursues enforcement cases and litigation where management has misled auditors, thereby sending out a clear message to would-be accounting cheats. Presumably, they also view bringing an enforcement action against those who knowingly mislead auditors as an easy way to bring accounting cheats ‘to book’.

Another argument is that the representation letters made by directors to auditors are too vague a basis on which to bring enforcement actions and here I have much sympathy. The current illustrative representation letter at the rear of International Standard on Auditing (UK) 580 ‘Written Representations’ is, in my opinion, not fit for purpose, out of date and too general. I would suggest that written representations could better and directly respond to the issues at the heart of so many inspection findings and can contribute to egregious accounting by management.

However, the worst thing about the wording in sub sections 499(3) and 500(4) is that “A statement made by a person in response to a requirement under this section may not be used in evidence in criminal proceedings against him except for proceedings for an offence under section 501”. This seems to have effectively created a wide-ranging ‘get out of jail free’ card for those who knowingly mislead auditors. I would suggest the relevant subsections are updated as soon as possible.

So, what should the policymakers do? Is this a time to ‘pine for the fjords’ or merely appear stunned? I would suggest those responsible for reviewing the level and nature of enforcement against would-be accounting cheats should upgrade sections 499 to 501 of the Companies Act and at the same time ask themselves another deep question: why aren’t these cheats being disqualified more often for making misleading statements to auditors? Changing that situation again would send out the right message and give the quality of auditing some real support here in the UK. The time has come to breathe life into this Norwegian Blue Parrot.

The views expressed in this article are those of the author and not those of ICAEW. If you have alternative views of sections 499 to 501 of the Companies Act 2006, please get in touch via our Feedback for Tougher Sanctions form.

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