What the ICAEW Could Do With Its £148m

Guest blog – Richard Murphy

A recent review of the accounts of the Institute of Chartered Accountants in England and Wales (ICAEW) that I undertook on behalf of the Audit Reform Lab and the Corporate Accountability Network (of which I am a director) revealed that it has received more than £104 million in fines paid by its members with regard to their deficient work since 2015. On top of that, it has made cost recoveries and generated other income from its disciplinary activities bringing the total funds generated as a consequence of ICAEW members delivering substandard work at cost of society to £148 million over the eight year period ending in December 2022. I have prepared a report on this issue.

As a consequence of the receipt of these fines and costs, which the ICAEW says it has not used to offset its operational expenditure, its reserves have increased between the end of 2014 and the end of 2022 by a total of £127 million.

In my opinion the ICAEW has understated the total scale of its benefit from this income in its most recent financial statements. It has acknowledged receipt of £105 million in fines since 2004 but does not add this sum the total cost recoveries. In addition, when challenged on this issue, it has claimed that the total gain arising is only £127 million because it has included in its calculations the losses incurred on disciplinary activities before 2015. We think that inappropriate, since those losses were routine and the gains are both exceptional and persistent.

Having appreciated the scale of this issue, we put it to the ICAEW that it was inappropriate for it to hold onto these funds. That is because doing so does, in our opinion, represent a conflict of interest within its operations that creates the risk of moral hazard. It appears to us that an organisation that is required by its Royal Charter to uphold the quality of accounting in England and Wales should not benefit from the failure of it to members to do just that, or from its own persistent failure to put into place a programme to make use of these funds to present that failure recurring in the future over the period of eight years during which they have accumulated.

When suggesting that there had been no use of these funds to date, we took note of the letter sent by Michael Izza FCA, the chief executive of the ICAEW, to Darren Jones MP, the chair of the House of Commons Business, Energy and Industrial Strategy Committee in 2022, in which it was stated that the ICAEW was now planning how to expend these funds, with the clear implication being that it has not used them to date despite the substantial time period over which they had been accumulated.

We have also noted with care the ICAEW’s stated strategic objectives, as included in its financial statements for 2022, and its proposed use of these funds included in the letter to Darren Jones MP in 2022. That letter suggests these objectives might be:

• Better regulation of ICAEW member’s continuing professional development.
• Increasing support to the Fraud Advisory Panel.
• Increasing support to the ICAEW’s Accounting for Sustainability initiative.
• Increased bursaries for students.

We have also noted that the ICAEW says that its strategic objectives for 2020 – 2030 are
to:

• Strengthen trust in ICAEW Chartered Accountants and the wider profession.
• Help to achieve the Sustainable Development Goals (SDGs).
• Support the transformation of trade and the economy [after Covid].
• Master technology and data.
• Strengthen the profession by attracting talent and building diversity.

We cannot see how these objectives need to be financed using revenue from fines and cost recoveries. All of them appear to be entirely within the scope of the normal operational activities of the ICAEW. As a consequence, we cannot see how funds spent on these issues could be expended out of the £148 million surplus that the ICAEW has generated form disciplinary related issues given that the ICAEW has said that it will not use these revenues for that purpose.

We also presume that this allocation of funds has not taken place. That is firstly because no provision for them is included in the accounts to 31 December 2022, when we believe that this would be necessary under the requirements of International Accounting Standard 37 if that allocation of resources had taken place. Secondly, we can identify no expenditure that is stated to have taken place out of those reserves to that date.

Consequence we have to presume that this entire sum remains intact within the financial reserves of the ICAEW, and the balance sheet suggests that this is the case. At 31 December 2022 the ICAEW had cash and financial investments exceeding £148 million on its balance sheet when eight years earlier, the equivalent sums were £40 million pounds

Taking all these factors into account we have proposed to the ICAEW that to fulfil the terms of its Royal Charter that requires it to fulfil that public purpose that it should now be prepared to use these funds in that way. Our suggestion is that this objective be fulfilled in two ways.

Firstly, as academics we are all too well aware of the limitations within the existing curriculum that we have to offer to undergraduate accounting students who wish to gain exemption from the accounts of professional institutes like the ICAEW. There is as a result of those requirements a significant focus on rather mundane technical accounting issues within that curriculum. Critical issues within accounting that have been highlighted by significant weaknesses within the profession in recent years are almost entirely avoided. As a consequence, we have suggested that a substantial research programme be undertaken between academic accountants and others to develop new curricula on the following issues:

1. Ethical issues in auditing, reporting and corporate structuring to cover matters where there is legal compliance but ethical non-compliance, as has so often been the case surrounding much corporate structuring, tax abuse, accounting standards arbitrage, and other issues. This would require the development of case study materials. It would also require new texts for teaching purposes.
2. The development if better awareness of the role of audit within society, to also consider the role and responsibility of the auditor and how the public might be made more aware of these.
3. Accounting and sustainability as an issue in its own right to cover both what is required now and what might be required. The development of a comprehensive curriculum with a body of support materials is essential.
4. The responsibility of the accountant and auditor to stakeholders outside financial markets. If a quoted multinational corporation is a public interest entity (PIE) then it cannot only be of concern for audit purposes to its stakeholders and suppliers of capital. All stakeholders need to be considered. This work would require consideration of the needs of suppliers, customers, employees, regulators, tax authorities and civil society.
5. Small and medium sized enterprises (SMEs), which have always had accounting standards cut down from those of multinational corporations, which makes no sense because the needs of their stakeholders are fundamentally different. Research is required on the accounting data that the SME community really requires and how it should be supplied with a resulting development of a relevant curriculum.

Even if we allowed generous budgets for these projects, and the allocation of significant funding for PhD students to develop and advance these issues now and in the future, it is still very hard to see how a sum of in excess of £40 million could be spent on this work.

We have therefore proposed that the remaining £100 million plus funds left over should be transferred from the ICAEW to an independent charity. It is our suggestion that this independent charity should then use these funds over a period of at least 10 years to both develop and deliver a training program for young (and potentially other) people who wish for training in the essentials of personal finance that anyone must understand if they are to successfully manage their affairs in the modern financial world. Our suggestion is that this course should cover the following issues, and maybe others:

• Accounting, including an understanding of the basic content of accounts.
• Finance, including most especially:
  • Personal budgeting.
  • The types of credit facility available to young people.
  • The risks and pitfalls of property renting and purchase.
  • The essentials of insurance.
  • Renting, mortgages and related issues.
  • Avoiding fraud and other risks.
• The difference between employment and the various types of self-employment available to people in the UK.
• An outline of the UK’s major taxes and how they are relevant to young people, including an understanding of their role in the economy and its management.
• When and how to ask for help.

We believe that an online exam leading to the grant of a certificate from this course would be a valuable contribution to wider education on these issues and might be something that many employers might both encourage and appreciate.

It is our belief that this suggested programme would:

1. Address a considerable social need that fits entirely with the ICAEW’s purpose.
2. Advances the aims of the ICAEW and promotes its activities.
3. Removes the current conflicts of interest within the ICAEW.
4. Makes the ICAEW accountable for the harm its members have caused and demonstrates its intention to offer remedy.

We believe that this proposal would win widespread public support. We also think this is
legally possible as it fits within the remit of the ICAEW charter.
Given the breadth of issues to be covered, we think it is entirely possible that this certificate could be, rather like the Duke of Edinburgh award scheme, be tackled in stages, with certificates being issued after online testing at each stage, with bronze, silver and gold certificates being awarded, each of which might be of significant value to potential employers in appraising the suitability of applicants for jobs in all areas of the economy.

The ICAEW has indicated its willingness to discuss these issues with us, but at the same time has been extremely negative with regard to the suggestions made so far. They have, for example, suggested that they are already supporting curriculum development, but that ignores the issues that we raise. They have also suggested that they could not transfer funds to an independent charity, even though they already have one which has an endowment of £15 million within it, and they have acknowledged that they do already support some education programs outside the direct field of accountancy without any apparent conflict arising with the Royal Charter.

They have, additionally, suggested that they do not need to identify the sums within their reserves as these are, apparently, all retained for strategic purposes, even though given what they have said of these funds this would clearly imply that those reserves could not as a result be used to cover any operational deficits that might arise within the ICAEW reasons in the future, the need to cover which risk necessarily requires the differentiation that we have suggested.

It has been disappointing to note a number of issues that have arisen from this research.

The first has been the lack of clarity on this issue from the ICAEW, not least within its own accounts.

The second has been its lack of willing to identify how these funds might be used by allocating budgeted sums against objectives, which failure appears to be contrary to the principles of good governance, which we would expect to be enshrined within its procedures.

Thirdly, claims by the ICAEW that it has already expended sums for strategic purposes made to journalists are obviously contradicted by the fact that no such expenditure has been identified in its accounts, even though the ICAEW has said it will never expend the funds generated by fines for operational purposes.

At the very least this research reveals a worrying lack of clarity about the management of reserves by the ICAEW. We also suggest that it reveals a lack of understanding of the need for strategic provisioning, if that has taken place, and accountability for the use of funds for that goal.

Finally, it suggests that the ICAEW has not yet come to proper terms with its obligations to society that should have meant that when it recognised that it was being enriched because of fines paid by its members it should have put in place programme for public benefit straightaway.

Members of the Audit Reform Lab will be requesting meetings with the ICAEW to advance all these issues over the coming weeks in months. Whilst it might be unrealistic to expect a complete meeting of minds on the use of these funds, what we do believe is that the ICAEW has an ethical duty to heed our concerns and to act upon them because it is unacceptable in the current environment of corporate accountability that it retain control of funds for its benefit, and the benefit of its members, when those funds were generated as a consequence of its own failure to uphold the proper standards of accounting and auditing that its own royal charter requires that it do.

Read the full report →