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February 2, 2023

Unsurprisingly, Firms Did Not Totally Rat Themselves Out to the UK Audit Regulator About Exam Cheating

an older man cheating on an exam by spying on answers

Exam cheating has been a hot topic in audit ever since EY got fined a record $100 million over the summer for cheating on ethics exams (ironically), and perhaps even before that when KPMG got caught using confidential information supplied to them by a PCAOB insider to improve the firm’s audit inspections years before. It happens. Everyone knows it happens. Everyone just doesn’t talk about it.

The EY cheating scandal prompted UK audit regulators at the Financial Reporting Council to send a letter out to the largest audit firms in July asking what these firms are doing to prevent a repeat of the EY situation. And apparently the FRC is kinda OK with what they heard back from Deloitte, EY, KPMG, PwC, BDO, Grant Thornton, and Mazars, as evidenced by a letter published today:

Earlier this year, the FRC decided to conduct a review of the controls and assurances that are in place at the largest audit firms and professional bodies to identify and prevent exam cheating. The review was prompted by recent regulatory sanctions imposed on audit firms around the world regarding exam cheating. The FRC remains deeply concerned about these events and the potential impact on UK audits.

As part of the FRC’s review, we wrote to each of the seven largest audit firms (“Tier 1 Audit Firms”) and to certain of the Recognised Qualifying Bodies (the “RQBs”) asking them to report to us on the control and assurance arrangements they have in place to identify and prevent exam cheating.

The FRC goes on to say that through this review and other supervisory activity, the FRC became aware of instances of cheating at Tier 1 firms. These include the matters relating to the PCAOB’s recent sanctioning of KPMG LLP, the FRC said. Earlier this month, the PCAOB imposed $7.7 million in fines on KPMG Colombia, KPMG UK, and KPMG India. We assume the FRC is referring to KPMG UK which got dinged for answer-sharing on internal training [PDF of the PCAOB order].

The issues raised by exam cheating therefore remain live and the FRC’s consideration of them, and any further regulatory action needed in response to them, is ongoing, the FRC said.

That said, the FRC doesn’t think cheating is a huge issue across the firms it questioned about cheating.

The information that has been provided to us to date has not revealed systemic issues related to cheating at firms or RQBs. However, it has revealed issues that require improvement. Affected firms and RQBs have committed to review and/or update relevant policies and procedures. The FRC reserves the right to take further investigation and intervention.

For the self-snitching part, the FRC explains its method of collecting information from firms:

We asked the RQBs to provide details of the controls they have in place to ensure the integrity of examinations and testing of students and members and to set out the preventative and detective controls they have in place to ensure that incidents of the kind referenced above do not happen in the UK. We also asked how they obtain assurance as to the controls’ effectiveness.

The seven largest firms provided the FRC details of the controls they have in place to prevent cheating which have been summarized below:

Financial Times spoke to Sarah Rapson, executive director of supervision at the FRC and she said that “cheating by accountants in internal tests was just as serious as in professional exams, rejecting the view of some in the profession that there was a ‘hierarchy’ of misconduct depending on the type of assessment.”

“We remain pretty concerned about exam cheating,” she said. “The audit profession is a position of trust and there’s an irony where you’ve got auditors seeking to cheat on ethics exams and that sort of thing.”

For the purposes of this discussion, lets revisit what someone at PwC told us about cheating:

Everybody shares answers. To think that no one does is naive. But be smart about sharing your answers. Don’t do electronic sharing. We pass around the answers the old-fashioned way—on paper, like on a Post-It note—and then shred the paper. We work long hours and are expected to take the same training tests every year. We’re overworked and underpaid, and we don’t have time for that.

The FRC might want to think about checking the trash cans at the office.

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