The U.K. accounting watchdog is ramping up misconduct fines after being called useless and toothless by lawmakers irate at the failure of the accounting industry to prevent several high-profile corporate collapses.

Over two days last week, the Financial Review Council levied penalties totaling 14.5 million pounds ($19 million), almost equal to the total fines that the regulator issued in all of 2017. And late Monday it issued an unprecedented warning that KPMG’s audit work is of an unacceptable standard and the firm will face increased scrutiny.

The regulator’s renewed vigor comes as lawmakers repeatedly complain that lax accounting has contributed to some of Britain’s biggest corporate scandals. In addition to anger at the regulator — which faces an independent review of its effectiveness — there is open speculation in Parliament about breaking up the big four audit firms to increase competition and improve standards.

On June 12, The FRC fined PricewaterhouseCoopers a record 10 million pounds for its 2014 audits of collapsed department store BHS Group Ltd. and the Taveta Group. A day earlier it fined KPMG 4.5 million pounds for its 2013 audits of technology company Quindell. The fines paid by the companies were discounted to 6.5 million pounds and 3.15 million pounds, respectively, for settling at an early stage.

Poor Performance

And on June 18, the regulator said that auditors at KPMG don’t challenge management enough, aren’t sufficiently skeptical and are inconsistent in their execution of audits. To address the poor performance, the FRC will increase the number of KPMG audits it inspects in the current financial year by 25 percent.

KPMG said in a statement that it is “disappointed” with the results and working to improve its standards.

“We cannot and will not be satisfied with these results and, as a firm, we are already working to put this right,” Michelle Hinchliffe, head of audit at KPMG, said in a statement. A week ago, the accounting firm had said it regretted that some aspects of its Quindell audit “did not meet the required standards.”

The regulator is facing an independent review into its effectiveness after auditors it oversaw signed off the accounts of high-profile companies including BHS and builder Carillion Plc that later collapsed, leading to thousands of job losses. In addition, a report by a former appeals court judge last year said that the watchdog should levy higher fines and make greater use of non-financial penalties.

‘Feebleness and Timidity’

A U.K. Parliament committee report last month said that the accounting watchdog and the pensions regulator were “united in their feebleness and timidity” on builder Carillion’s accounts, and that the FRC “identified concerns in the Carillion accounts in 2015 but failed to follow them up.”

Atul Shah, Professor of Accounting and Finance at the University of Suffolk, said that the FRC record has been “appalling” because it has only reacted after corporate collapses rather than preventing them.

“Most of the damage has been done,” he said in a phone interview. “Fines are being seen as a cost of business.”

Not Enough

The beefed up fines—the PwC levy set a record—aren’t enough for lawmakers. Frank Field, a Labour Party member of parliament, is already calling for the PwC fine to be increased, saying the regulator gave no explanation for the size of the penalty.

PwC partner Steve Denison was also fined 500,000 pounds for the BHS and Taveta audits, severely reprimanded and ordered him not to perform any audit work for a period of 15 years.

A spokesperson for the regulator said “we have increased the number of staff in our enforcement division in recent years in order to process cases quicker and to undertake the volume of cases we take on.”

The accounting industry itself has come in for its own criticism. Lawmakers have called for a separate report by the FRC and the U.K.’s Competition and Markets Authority to consider whether the “big four” auditors Ernst & Young, PwC, Deloitte and KPMG should be broken up to create more competition.

Michael Izza, head of the U.K. Institute of Chartered Accountants in England and Wales, said that the drive for higher fines is at odds with a push to break up the big four. He argued that bigger penalties scare off smaller competitors, as “the risk in imposing ever-greater financial sanctions is that these increase the risk profile of auditing.”

Since changes were made in regulations of auditors in 2016, “there has been a significant drop in the number of accountancy firms being prepared to carry out public interest entity audit work and we believe the numbers will continue to fall sharply,” he said in an emailed response to questions. This “runs contrary to the recent calls for greater competition.”

Topics Legislation