The Wirecard scandal has made for an engrossing account of corporate failure since the news emerged that the German financial payments processing company had been inflating its accounts. Now that the company has collapsed – the first time that a member of the German Dax index has failed – the ramifications are starting to be revealed. The EU is now investigating the role played by BaFin , the German regulator tasked with regulating the company, whilst the FCA in the UK has ordered the British arm of the company to freeze all of their customers’ accounts . Now that the aftermath is continuing to fold, the focus is now rightly turning to why the alarm bells were not sounded earlier by those both paid and expected to do so.   Of particular concern has been the auditing conducted by Ernst & Young (EY), and the credit rating conducted by Moody’s. With investors standing to lose out considerably because of this collapse, the performance of these gatekeepers is a massively impo...

Simon Dingemans, the former finance chief for GlaxoSmithKline and long-term employee of Goldman Sachs, has surprisingly and abruptly quit his role as the Chairman of the Financial Reporting Council, less than a year after taking the helm. In this post we will look back at his tenure and find out why he has decided to move back into the private sector. We analysed Dingemans’ appointment late last year here in Financial Regulation Matters , where we discussed his taking aim at the auditing oligopoly that the FRC has responsibility for regulating. At the time, Dingemans stated that ‘ this is a rare opportunity to reform something so wholeheartedly ’, and he made the break-up of the ‘Big Four’ and their oligopolistic hold on the auditing marketplace a priority. However, since his appointment it has been business as usual. The regulator has continued investigating members of the oligopoly, whilst also calling on members to upgrade their auditing tools . This is nothing out of the ...

In August 2018, KPMG were fined £3m for acting as an expert witness for Ted Baker in a civil case whilst also providing the fashion company with auditing services. On both sides of the Atlantic, KPMG has received numerous financial penalties for its misdemeanours so it is, of course, no stranger to getting into trouble. However, news this week of financial problems within Ted Baker may cause KPMG further trouble, with this coming hot on the heels of its £5m fine for its performance regarding the auditing of the Bank of New York Mellon . This short post will review the recent developments at Ted Baker and ask whether it is to be considered that auditors will naturally transgress, and that financial penalties are simply to be considered ‘par for the course’. On Wednesday it was widely reported that Ted Baker had admitted to an accounting error – it has overstated the value of its stock by nearly £60m . Media reports confirm that, last month, the firm had hired Deloitte to invest...

A number of developments regarding stories that we have been covering for quite a while here in Financial Regulation Matters have taken place recently, so in this post we will look at some updates on each one to see how the issues are developing. Fiat-Chrysler Finally Merge with PSA Peugeot We last looked at developments within the automotive industry in September with the credit downgrade of Ford , but one of the underlying sentiments within the industry has been that companies may, or will need to merge in order to survive their environment. Tougher regulations, increased costs, potentially saturated marketplaces, the need to keep up with technological advancement, and inconsistent and unpredictable economic and social arenas are making the job of manufacturing and selling cars much harder. The three largest automotive players are Toyota, Volkswagen, and the Renault-Nissan alliance. Now, the fourth largest is this new PSA-Fiat Chrysler merged partnership which, according...

It was only earlier in the month that we looked at the comments made by the new Head of the Financial Reporting Council (FRC) regarding the audit oligopoly and the potential of reforms heading its way. In today’s business press, it is being reported that Deloitte – the second-largest British accounting firm – has altered its policies so that now Non-Executive Directors have the final say regarding the level of pay and bonuses that its auditors can obtain. In this short post we will look at these plans and assess the validity of the move with regards to the potential of regulatory reform making its way to the sector. The Financial Times was clear this morning that the move was purely aimed at preventing ‘ the perception of conflicts of interest between its audit and consulting divisions and avoiding a forced split ’. The article says that the Non-Executive Panel – which includes former Barclays Chairman Sir Gerry Grimstone – ‘will review the policies and performance metrics by...

The subject of auditors, their regulators, and the conflict of interest that occurs when those auditors provide consultancy services has been well covered here in Financial Regulation Matters . We have examined the issues within the Financial Reporting Council (the UK’s main regulator of audit services) that have seen the regulator’s internal structures change recently. We have also examined a number of issues affecting the audit sector, including the presence and effect of an oligopolistic model , the so-called ‘ expectation gap ’ that exists between how the auditors perceive their role to how the market and society perceives their role, and also how some auditors have started to take voluntary steps to divest or spin-off their consultancy arms . With regards to the last point, we spoke about how either allowing auditors to voluntarily divest, or forcing them to divest with no long-term strategy was a mistake, so the recent comments of the new head of the FRC are worth examining. ...

In 2016, a number of new rules regarding the auditing of large financial institutions within Europe were established. The regulations had a number of aims and we will discuss them in today’s post, but one of the major aims was to ensure further transparency when it came to the auditing of PIEs, or ‘Public-Interest Entities’. Interestingly, this designation allows the EU to capture financial institutions that hail from outside of the EU, and in today’s news the first test of those regulations was passed when Goldman Sachs announced that its new auditor from 2021, in complying with the rotational elements of the regulation, would be Mazars, marking the Bank’s first move outside the so-called ‘Big Four’ auditors in its history. The regulations that came into force in 2016 have a number of aims including: ensuring further transparency; providing statutory auditors with a strong mandate to be independent; develop a more dynamic audit market; and to improve the supervision of auditor...

In February Kraft Heinz announced that the Securities and Exchange Commission was opening an investigation into its accounting practices. In this post, we will examine the potential scope and ramifications of that investigation as, although Kraft Heinz have not found any irregularities internally, there are a number of associated organisations who will potentially be embroiled in the scandal if it is found to exist. We have discussed Kraft Heinz as a company before here in Financial Regulation Matters, mostly on account of its failed attempt to take over Unilever in 2017. Whilst the subpoena was announced in February of this year, it was actually received in October and the subpoena related to the firm’s ‘accounting policies, procedures, and internal controls’. The company then, in February, took a $15.4 billion impairment charge, or a ‘writedown’, and that is now believed to be something the SEC are also investigating. The company stated that the writedown reflected ‘lower margin ...

In this second post, we will look at the news that Ernst & Young (E&Y) are facing a massive and highly unusual (for Japan) $9 billion lawsuit for its audit failings that led to investors in Toshiba losing out significantly. As E&Y have already had issues with Toshiba, it is worth examining this current instance to see whether this is a continuation of auditing failings across the globe. As part of one of Japan’s worst accounting scandal s for some time, E&Y were fined $17.4 million in 2015 for ‘failing to spot irregularities’ in its audit of Toshiba’s accounts. The firm were banned from taking on new business contracts in the country for 3 months, and at the end of 2015 the firm’s regional Head resigned . Yet, this week the firm is once again making headlines in Japan for its performance, or lack thereof. The firm is facing a shareholder lawsuit for $9 billion and is accused of being partly responsible for Toshiba’s failure to ‘ disclose losses at Westinghouse ’ ...

In this very short post we will react to the news that broke today regarding the future of the Financial Reporting Council. We have covered the FRC on a number of occasions here in Financial Regulation Matters and the posts have been highly critical of what was a feeble regulator. We had only looked previously at the regulator and the fact that it was under review, but today the final decision was made on the future of the FRC. Founded in 1990, the Financial Reporting Council was today confirmed by the Government as being no more. In its official press release, the Government stated that, after considering the Kingsman Review, the FRC would be replaced with a new regulator. That regulator will be called the Audit, Reporting and Governance Authority . The business media are reporting that the new regulator ‘ will have stronger statutory powers, including the ability to make direct changes to accounts and powers to require rapid explanations from companies and publish reports ab...

On a number of occasions here in Financial Regulation Matters we have discussed the credit rating and audit industries. They have taken up a number of posts on account of their negative and impactful behaviour, and in most of the posts we attempt to conclude as to why they a. act in such a manner, b. are allowed to continue acting in such a manner, and c. what may be done to alter that behaviour. Often, we conclude by discussing the oligopolistic features of their industry and implying that those dynamics are the fundamental answer to all three aspects. However, the word oligopoly is sometimes defined within the posts, but often it is not elaborated what the concept is and why it is so impactful within these financial industries that are so crucial. In this post we will dissect the concept of an oligopoly and examine why the two identified industries are absolutely defined by the concept. The term oligopoly roughly derives from the Greek words oligoi – meaning ‘few’ – and p...

We have only looked fleetingly at the story of Grant Thornton – The British-founded ‘professional services’ company that is now regarded as one of the largest firms outside of the traditional ‘Big Four’ audit firms – and its connection to Patisserie Valarie. As the chain sits currently in administration and is ‘ set to be sold off piecemeal ’, the role of Grant Thornton in auditing the chain just before it collapsed has brought the auditor firmly into the spotlight. Grant Thornton’s CEO is currently facing questions from MPs and, as part of his response, he has told the House of Commons Committee that there was an ‘expectation gap’ between what is expected of audit firms and what they do in practice. In this post, we will review the story and analyse the developments, but focus more on this concept of an ‘expectation gap’ existing in relation to the auditing industry, which is particularly centralised within the financialised society we live in. Patisserie Valerie entered in...

As 2019 begins and we look back on 2018, it has been, as always, a busy year for the world of business and the regulators tasked with controlling it. In this review post, we will look back over the year by sector, and discuss some of the flashpoints to analyse whether there are any themes that can help us foresee what 2019 has in store. Before that, I would like to thank everybody for their continued support of the blog, and also all of those kind contributors who have provided guest posts throughout the year. Also, in a bit of shameless promotion, my first two books are now available for purchase and I would like to thank everybody at Routledge for bringing Regulation and the Credit Rating Agencies: Restraining Ancillary Services to life, as well as everybody at Palgrave Macmillan for bringing The Role of Credit Rating Agencies in Responsible Finance to life. A Year of Failure There were a number of high-profile failures this year, and many were socially impactful. In 201...