Anyone working in
the accounting space could find themselves caught up in a situation that doesn’t feel right, and be pressured into making questionable decisions. Intentional or not, crossing the line, or failing to act, could have devastating consequences, says Nick Martindale
Very few chartered accountants or auditors set out with the intention of committing fraud. For one thing, the chances of discovery are extremely high, while the reputational damage alone would be enough to ensure a swift end to a career.
Yet there are times when those in the profession can inadvertently become embroiled in difficult situations, whether that’s coming under pressure to sign off forecasts without being able to fully evaluate them, or perhaps failing to investigate when something doesn’t seem quite right.
“This general area is one where the professional comes up against the business, and the professional working in the business is put under pressure to bend their professional standards,” says Simon Webley, research director at the Institute of Business Ethics. “It’s things like cutting corners or being asked to ‘sign here’ without having read or checked it because you’re under pressure to get it done, and you fear that your job may be pressurised if you’re not a good team member.”
For accountants, there is a risk of getting too close to fraud for comfort, says John Binns, a partner in the business crime and corporate regulatory department of BCL Solicitors. “A typical circumstance in which an accountant could become involved in fraud is when their client (or the person instructing on behalf of a corporate client) is attempting to defraud someone – creditors, fellow directors, HMRC, investors, shareholders or the market generally.
“Their method could be to present false information to or via accountants, so that it feeds into apparently legitimate documents such as annual reports, tax returns or prospectuses. Failing to spot that – or worse, failing to act on a suspicion – could lead to trouble.”
Allan Maund is head of compliance and risk at Dains Forensic. He says such circumstances do occur, and the concept of forecasting makes for particularly dangerous ground. “You’re forecasting for the next year ahead, and there could be good or bad times,” he says. “When those figures are produced for a year down the line, that’s when the challenge needs to be applied. If those forecasts turn out to be way out then that’s something you need to look at further down the line with regard to your models.”
Katharine Bagshaw, technical manager, auditing standards, at ICAEW, also highlights the concept of ‘Big Bath’ provisions, under which firms can take a one-time charge against income in order to lower expenses in the future. “It means they can effectively make figures look better than they are,” she says. “But it doesn’t give the reader of financial statements the true picture of the level of volatility. If businesses are volatile then we all need to know about it.”
There can also be issues for accountants working in practice, says Michael Axe, senior associate in the dispute resolution team at Gardner Leader Solicitors, when they may find themselves under pressure from clients to ignore their better judgement. “Obviously, any accountant will want to develop a good relationship with their clients, but they must always bear in mind their professional duties when providing any advice, and not succumb to pressure from a client to act in a way that they consider compromises their professional integrity,” he warns.
ICAEW’s Code of Ethics contains five fundamental principles to which all members must adhere: integrity, objectivity, professional competence and due care, professional behaviour, and confidentiality. “What we’re talking about here probably falls into the integrity and objectivity areas,” says Sophie Falcon, integrity and law manager at ICAEW. “Integrity says you have to be truthful and honest and not be associated with misleading information. Objectivity is around not letting bias influence your judgement.”
Then there’s confidentiality. “ICAEW’s Code of Ethics has always said there is a principle of confidentiality but if it’s in the public interest to do so then you can breach that,” says Falcon. “That’s controversial and not something other countries have in their codes.”
But NOCLAR – or Non Compliance with Laws and Regulations – effectively places a public interest obligation on accountants who suspect an illegal act to override confidentiality, if permitted to do so by law and regulation. “For some countries it’s a really big change𠊋ut for us it’s more detail and interpretation of what we’ve already had,” adds Falcon. “But the fact that the international code has brought this in is a recognition that it is an issue that accountants face and need guidance on.” The code has been in place since 2017, but will only come into force in the UK in January 2020.
When it comes to auditing, there’s a strong emphasis on professional scepticism, says Bagshaw. In recent years, the sector has come under fire for failing to seek out ‘conflicting’ rather than ‘corroborative’ evidence. “That’s𠊊 really interesting debate, and politically it seems attractive,” she adds. “But no evidence is absolute, or conclusive one way or the other. That’s why you look for different sorts of evidence from different sources so they all back each other up. You’re not allowed to ignore ‘conflicting’ evidence but auditing standards have never made you go out looking for it, not least because it isn’t clear where auditors would start, or what it would look like.” She does concede, though, that the word “challenge”, or something similar, might appear more in auditing standards. The IAASB has current projects on both audit evidence and professional skepticism in which this subject is being looked at in some detail.
The advice for accountants or finance professionals is to exercise caution from the outset, says Binns, and to challenge anything that appears to be “too good to be true” or which looks like an attempt to circumvent the rules.
“If and when an enquiry is launched, an accountant will want to ensure they can explain their thinking and, importantly, refer to contemporaneous documentation in support of this, perhaps an email exchange with the client, a note of a call or internal meeting, or a file note to record their thinking at the time,” he says.
A first port of call should be to raise any concerns internally, says Webley, but it’s vital that the organisational culture is such that people feel they can do this without fear of reprisals: “We suggest that at the very beginning of their job they make sure they have the right to raise issues at a higher level than their immediate boss. The question should be asked at interview or when you look at the organisation. If you don’t, you might well reject that organisation.”
For those in practice, sometimes this means being prepared to say “no” to clients. “An accountant engaged to provide advice is under𠊊 legal obligation to exercise reasonable skill and care when doing so,” points out Axe. “This means that even if the advice is not what the client wants to hear, it must be given nonetheless. In many cases where an accountant has got themselves into legal trouble, it’s been because the accountant has wanted to do their client a ‘favour’ by accommodating a request against their better judgement.” ICAEW members can also raise any concerns by calling ICAEW’s ethics helpline, where they can get specialist advice on how to handle situations. ICAEW’s training films, Without Question and False Assurance, also provide a useful resource for teams seeking to improve their skills in this area.
Employers have to play their part too, particularly in creating a culture where people can raise concerns and in establishing anti-bullying protocols. “The proportion of employees in surveys who say they have seen something they are concerned about has been roughly in the area of 35-40% and only half of those have raised that issue, and that to us suggests something is wrong,” says Webley. “What’s wrong is that there isn’t enough openness in the organisation for people to feel free to do that.”
IBE has recently launched its own Speak Up initiative, designed to help people raise concerns before it is too late, in an attempt to move away from the term “whistleblowing”. “I can give one incident of a company of professional engineers that made that change and the person responsible for it said the number of calls went up 10 times,” he says. He also recommends anyone raising concerns takes another person with them, rather than going on their own.
Organisations also need to ensure they get the right people into senior finance posts, adds Maund, particularly those who will have the strength of character to raise concerns. “A lot of organisations fall short in the recruitment process,” he says. “It’s not robust enough; it doesn’t challenge enough. Someone in charge of your finance function needs to be able to accept challenges for the senior role they’re in and adequately explain any issues or anomalies.
“I’ve been investigating fraud𠊏or 25 years, and you see some individuals who are in high-profile finance positions who have got there by default, promoted by time served rather than ability,” he adds. “That increases the risk significantly for companies.”
Simon Bittlestone, CEO of financial analytics firm Metapraxis, believes there is a strong case for the role of chief accountant to make a return. “This would give management or the board responsibility in ensuring correct accounting principles and the true reflection of the business performance in internal and external reporting,” he says. “It would provide an immediate and direct point of escalation for every accountant in the business to ensure a whistleblowing opportunity, and act as a reminder to them of their duties as an accountant.”
The consequences of becoming caught up in something which can spiral into fraud can be devastating, warns Binns. “An adverse finding from a professional body or, worse, a criminal court, could be ruinous and the time, expense𠊊nd stress of dealing with such situations in the meantime can𠊊lso be severe,” he says. Nor is the impact limited to career implications. “People have committed suicide, had marriage breakdowns and businesses have gone bust,” warns Maund. “It has a hugely detrimental effect, not just for the individual but the people around them and the company they work for. In the modern era with technology and social media, that reputational damage just doesn’t go away.”
In recent years there have been a number of cases where failings by the accounting team or external auditors to spot issues have resulted in hefty fines.
In July 2019, outsourcing firm Serco was fined £19.2m for fraud and false accounting under𠊊 deferred prosecution deal
with the Serious Fraud Office (SFO), after understating how profitable the contract was in a report to the Ministry of Justice, with its subsidiary organisation Serco Geografix admitting it had overcharged to tag criminals. The organisation had already paid £70m in compensation to the government and was also ordered to pay costs of £3.7m.
In 2018, construction firm Carillion collapsed, with debts of £1.5bn, after issuing three profit warnings in five months. In the wake of its demise, a parliamentary committee criticised the role of its accountants, KPMG, accusing the firm of approving figures that “misrepresented the reality of the business”.
In 2017, Tesco agreed to pay out £235m to settle with the SFO and Financial Conduct Authority following an accounting scandal which saw it overstate its profits by £326m as a result of how it booked payments from suppliers.