The FRC Reluctantly Releases a Report on PwC and BHS: Yet another Indicator of Weakness, or is it?

We have reviewed the collapse of BHS here in Financial Regulation Matters, whilst we have also reviewed the performance of the Financial Reporting Council (FRC) here. We also looked at a number of investigations that the FRC were undertaking with regards to the audit sector, with the regulator’s record fine against PwC for its auditing of BHS being one of the more recent actions taken. However, what looks like a victory for the regulator, at first glance, is quickly becoming anything but, and in today’s post we shall look at the sentiment of the regulators actions in this case.

When the announcement was made that PwC would be fined, and one of its partners involved in the audit banned for life, it was suggested by the regulator that they would be releasing an extensive report into what went wrong. However, Sir Philip Green initiated legal proceedings to amend, and essentially delay the report from being published on the grounds that it would negatively affect members of his holding company, Taveta. At the end of June, the High Court ruled against Green and his attempt to impose an injunction, meaning that the FRC were then free to publish the report. Yet, they did not. This quite rightly drew criticism, with Frank Field MP demanding to know when the report would be published. Yet, they still did not release the report. However, in The Sunday Times last weekend, the report was leaked, meaning the FRC had no choice but to release the report.

One would think that would be the end of this particular episode, and that we can now focus on the poor job that PwC did when auditing BHS. The report was released by the FRC on Wednesday, and spans nearly 40 pages. The report goes into detail regarding the lack of supervision undertaken by lead partner Steve Denison, the alarmingly short amount of time that was spent on the audit, and the decisions the board at BHS were allowed to take and have them signed off by PwC. The report is indeed highly critical of Denison, PwC, and the board at BHS, but there is one more twist in the tail. Today in the Financial Times, it is being reported that ‘the report released on Wednesday contains differences to the original document that Sir Philip attempted to block. The FRC declined to comment on what changes were made’. An example provided of the differences between the two versions include the previous report stating that the FRC concluded that the management at BHS had assumptions regarding future losses that ‘were not reasonable’; in the released report, that sentence was changed to the assumptions regarding future losses ‘should have appeared to the respondents to be very optimistic’. This change was that suggested by counsel for Taveta during the application for an injunction, and this has lead Field being forthright in his criticism for the concession. However, does this occurrence tell us something about the reality of the situation between a regulator and the regulated?

It appears that there is a fear that exists within financial regulators, and if we focus on the dynamics of that particular relationship we can perhaps see why. The theory behind the relationship is that regulators operate to protect the public from the iniquities within the marketplace, by way of either disciplining, or setting standards. Yet, the FRC’s actions, when combined with the actions taken by the FCA recently with regards to the releasing of a report into RBS and its GRG unit, suggest that the actual power dynamic within that regulator-regulated relationship is tremendously imbalanced. The regulators are, it appears, fearful of going against what are particularly wealthy and resourceful organisations, with the legal ramifications for the regulators being much higher if they were to enter a legal war with the regulated. There is also the issue of the regulators not wanting to alienate the regulated entities, as it is often prescribed that working with these entities, rather than ordering them is the more beneficial route to take. These points are valid, simply because they make sense. Whilst the regulators represent the state, they do not have the resources to challenge these massive organisations legally. Also, it will be easier to work with people and organisations who you have not alienated. However, if we look at it from the opposing side, there is an entirely different story.

What justice is there for the 11,000 employees of BHS who faced losing everything they had saved (and many will not receive what they are supposed to), or for the many SMEs who were put into a brutal machine within RBS and HBoS, and in the latter instance are continuing to be consistently disrespected by Lloyds in their handling of the case? The answer, it appears, is that the justice they may receive is second to the preservation of order. That sentence may seem conspiratorial, but it answers the question of why so few were imprisoned for criminal conduct in the Financial Crisis, and why so many other scandals are ‘settled’. But, perhaps this is too idealistic. Perhaps, there needs to be a recalibration of the role of the regulator. Do they exist to protect the public, or do they exist to ensure the efficiency of the marketplace? A definition for the word ‘regulator’ is ‘a person or body that supervises a particular industry or business activity’, but that does not describe for what purpose. If we are to ask, then, for what purpose do the regulators operate, it is arguably important to remove ideology from the equation (which would be a difficult exercise in the modern era given the prevalence of ideology over evidence). If we were to remove ideology and replace it with evidence, and historical analysis, then the answer of for who do regulators operate will become abundantly clear – need the answer be written here?

Keywords – FRC, BHS, PwC, Audit, Financial Regulation, @finregmatters