Serco Scandal: The Big Four to see heightened regulations

July 29, 2019

2 min read

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What's going on here?

Following a six-year criminal investigation into fraud and false accounting, one of The Big Four, Deloitte, has been given a £4.2m fine by the accounting watchdog FRC for their misconduct of audits of outsourcing giant Serco’s Geografix (SGL) division.

What does this mean?

SGL “cooked the books” to profit from over charging government contracts for the electronic tagging of offenders. SGL allegedly ‘supervised’ people who were dead, incarcerated or absent from the country over a period of 2010 and 2013. This led Serco to a hefty fine by the SFO (Serious Fraud Office) of £22.9m. They narrowly escaped criminal charges after Southwark crown court approved their deferred prosecution agreement in relation to the fraud and false accounting charges. But for this settlement agreement, the fine would have rocketed to £6.5m.

Deloitte’s £4.2m fine from the FRC arose from their audit of Serco Geografix in the period of 2011 and 2012 and comprised of £300,000 for the costs of the investigation and £97,500 for the Deloitte partner Helen George. It is said that at times, Deloitte partook in “quite deliberate fraud against the ministry of Justice”.

Why should law firms care?

The impact of these large-scale frauds, and subsequent fines, has a huge impact on reputation and the way firms operate. Deloitte’s substantial fine followed KPMG’s £4m fine in 2019 for the audit of Co-op’s bank account at the brink of collapse. This led to a substantial effect on the audit industry.

The Big Four accounting firms; Deloitte, EY, PwC and KPMG have been under a watchful eye since failures relating to the construction firm Carillon. This led law makers to call for a restructure of the way the accounting firms are regulated.

Reform and restructure have been called upon to improve the quality of audit work in order to ensure no repetition of Deloitte’s misconduct occurs. This has included the FRC being replaced with the Audit, Reporting and Governance authority. In addition, Deloitte, recognising their fault, have agreed a “program of continuous improvement for their audit quality process” which includes arranged staff training, designed to prevent similar failures.

This fine has led to a shake-up of the auditing market. It is likely to lead to heightened regulations for audit companies exacerbating high levels of risk and leading to high possibilities of fines if they do not adhere to new strict guidelines. Furthermore, it could lead to accountancy firms incurring training costs to ensure the new guidelines are met.

However, it is not all bad. The new regulations are likely to lead to an increased efficiency in the Audit sphere and a reduced level of fraud resulting from financial misconduct. But only time will tell.

Report written by Callum Tanton-Parham

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