Prem Sikka
Professor of Accounting
University of Essex
What do Edencorp, International Signal Corporation, London and Capital, London and Counties, London United Investments, Ramor Investments, Sound Diffusion, Lloyd’s of London, Johnson Matthey and Atlantic Computers have in common? They are examples of audit failures (see note 1) . Each involved a major accountancy firm that ticked and blocked, collected its fees, issued worthless audit reports and trusted people’s inability to call auditors to account. No partner from any of the major firms involved in any of the major audit failures has been disqualified. No regulator has investigated the overall standards of any of the firms involved. No firm has been required to issue a public statement, stating the reasons for the audit failures and the steps it is taking to remedy the failures. In each case, the auditing industry blamed someone else for its own shortcomings. The ‘expectations gap, and other usual suspects are routinely wheeled out. It is business as usual. The ranks of the audit failures and feather-duster regulation now further swelled by the Maxwell audits


The Maxwell story is the story of fraud and the watchdogs that routinely aped the three unwise monkeys. In the early 1970s, government reports (see note 2) investigated Robert Maxwell’s attempted take-over of Leasco Data Processing and criticized him for manipulating profits. They described Maxwell as “a person who cannot be relied upon to exercise proper stewardship of a publicly-quoted company”. But Maxwell was not disqualified from acting as a company director. He carefully surrounded himself with well-connected politicians, bankers, financiers and accountants and re-emerged as a leading entrepreneur. He became chairman of Mirror Group of Newspapers (MGN) and Maxwell Corporate Communications (MCC) and controlled more than 400 other companies (see note 3). Coopers & Lybrand became auditors of most of the Maxwell controlled companies and their pensions funds. Then in 1990, an investigative journalist (Daily Mail, 24 October 1990) began to investigate unusual movements in the monies of the pension schemes run by Maxwell’s businesses. A large amount of Mirror Group pension fund money was being invested in companies in which Maxwell had an interest. Despite letters from concerned pension scheme members, no regulator took any action (see note 4) . Then in May 1991, it was reported that the same pension fund took some 13 months after the year-end to issue its annual accounts (Daily Mail, 18 May 1991). The accounts revealed that of the top twenty investments, worth £160 million, only one was held in any of the top hundred companies, and that was Maxwell Communications. Then on 5th November 1991, Robert Maxwell committed suicide. Within days, anomalies were discovered in the pension funds of the Mirror Group and Maxwell Communications Corporations.

Maxwell’s private companies accumulated huge debts. To cover these and continue to present reasonably healthy financial statements (always with unqualified audit reports), Maxwell borrowed from banks against his holdings in MCC and MGN, as well as substantial cash and other assets of these companies and various pension schemes. This included pension fund assets that were managed by external managers. Maxwell supported the share price of his companies by using pension fund assets. It was estimated (see note 5)  that some £458 million was missing from various Maxwell pension funds. The fraud caused considerable financial and psychological distress to 16,000 pension scheme members (see note 6).

The public outcry led to the appointment of Department of Trade & Industry inspectors. Some seven years later, their report has still not been published. Following the Companies Act 1989, the accountancy profession is expected to investigate incidences of audit failure and take appropriate disciplinary action against the auditing firms, if appropriate. In a very elaborate regulatory maze, such tasks are delegated to the Joint Disciplinary Scheme (JDS); an organisation originally created in 1979 in response to the previous audit failures. The JDS is financed by the accountancy profession which also decides the cases which are referred to it. The Institute of Chartered Accountants in England & Wales (ICAEW) asked the JDS to investigate 35 complaints against Coopers & Lybrand and 24 complaints against four individual partners, in relation to Mirror Group of Newspapers and other Maxwell companies for the period 1988 to 1991.

The verdict on Maxwell auditors, Coopers & Lybrand (now part of PriceWaterhouseCoopers) was delivered in February 1999, some seven years after Maxwell’s suicide. A three man panel found that a lack of objectivity in dealing with Mr. Maxwell and his companies lay at the heart of many of the 35 complaints laid against the firm and four of its partners. The JDS concluded that “The complaints reveal shortcomings in both vigilance and diligence and a failure to achieve an appropriate degree of objectivity and scepticism, which might have led to an earlier recognition and exposure of the reality of what was occurring”. The report concludes that the “firm lost the plot” and  “got too close to see what was going on”. The firm admitted 59 errors of judgement.

Most of the blame is allocated to the main audit partner Peter Walsh, who died in 1996. According to the JDS report, four Coopers & Lybrand partners failed to meet the required professional standards in auditing various parts of the Maxwell empire. The next senior partner John Cowling, against whom twenty complaints were listed, is censured and ordered to pay costs of £75,000 and fined a total of £35,000. The report says that Cowling had never encountered fraud before and criticised him for too easily accepting management explanations (see note 7) . He failed to qualify the accounts of London & Bishopsgate Investment; a business controlled by Maxwell, even though it had failed to maintain proper records or adequate control systems and did not reconcile clients’ money. Of the other three partners involved, two paid costs of £10,000 each and were admonished. Another partner paid costs of £5,000.

What would happen to a doctor/surgeon who admits to 59 errors of judgement and generally ‘losing the plot’? That surgery is likely to be closed down.  The licences of the doctors concerned would be withdrawn and their standards of work would probably be subject to an independent investigation. But auditing is a law unto itself. The four audit partners concerned are still employed by the firm and earn six-figure salaries. None of the partners have been disqualified from public practice. No one has investigated the overall standards of the firm, or its successor firm. Coopers & Lybrand have been fined £1.2 million which works out at £2,000 per partner (Coopers had 600 partners). The firm has also been asked to pay £2.1 million in costs. Taken together this amounts to £6,000 per partner, all probably tax deductible. To put this in context, it should be noted that for the period under investigation, Coopers received £25 million in fees from Maxwell. The UK fee income of PriceWaterhouseCoopers is estimated to be around £1.8 billion and the firm’s world-wide income is around £10 billion. The major firm barons would, no doubt, be quaking in their boots, all the way to the bank.

The accountancy establishment’s public ‘spin’ is that the JDS is a tribunal and a quasi-court. But the JDS processes are remarkably different. It does not owe a ‘duty of care’ to anyone and the public is not admitted to any of its proceedings. The JDS report does not list the evidence examined, the questions asked and the replies received. It does not indicate how the JDS came to filter and weigh various pieces of evidence or why it decided to neglect or downgrade some categories of evidence. The transcripts of the JDS proceedings are not publicly available. Under its rules, Coopers can appeal against its findings, but the investors and pension scheme members affected by the audit failures cannot. It is inconceivable that any judge or jury can find a firm guilty and then proceed to pocket the fines. Yet this is exactly what has happened for the Maxwell audits. The fines and costs will go to the JDS instead to being used to compensate the victims of audit failures. This in turn reduces the financial contributions that the accountancy profession is obliged to make towards the running of the self-regulatory structures.

The JDS report is a major disappointment for a number of additional reasons as well. In addition to acting as auditors, Coopers & Lybrand sold a variety of non-auditing services to the Maxwell empire. This increased the firm’s income dependency on Maxwell and must have, at least in the eyes of the outside world, compromised auditor independence. Yet the JDS report makes no effort to investigate the ‘independence’ aspects.

Will the paltry fine and the adverse publicity do anything to curb audit failures? The answer has to be no. No doubt, the auditing industry would argue that complex frauds are difficult to unravel, and that no one can stop a determined fraudster. Such comments are designed to disarm critics, journalists, politicians and academics alike. They deflect attention away from the economic and cultural context of auditing. The truth is that audit failures are not brought to public attention through any vigilance by audit firms, professional bodies or the regulators. They came to light because the stench of scandal became too strong. One can only wonder how many others are waiting to be discovered. If by hook or by crook a business survives, audit failures remain concealed.

Like everyone else, auditors need economic incentives to deliver products and services. Does the auditing industry have them? The answer is no. Following the House of Lords decision in Caparo Industries plc v Dickman & Others [1990] 1 All ER HL 568, auditors do not owe a ‘duty of care’ to any individual, present/potential shareholder, creditor, employee, pensions scheme member, bank depositor or any other stakeholder. They only owe a ‘duty of care’ to the company or shareholders collectively. No one can sell a car, breakfast cereal, packet of potato crisps, or sweets without owing a ‘duty of care’ to current and potential customers. Yet the auditing industry is not subjected to the same requirements. The absence of a ‘duty of care’ to individual stakeholders does not provide strong economic incentives to deliver good audits. Despite preaching accountability to everyone else, the auditing industry has failed to develop any publicly visible criteria for measuring the quality of its performance. The regulators could generate pressures for change, but an independent regulator does not regulate the auditing industry.

In an ideal world, one might expect that auditors are public-spirited, but research studies increasingly confirm that this is not the case. Research studies examining the socialisation processes in the Big-Five conclude that “the emphasis is very firmly on being commercial and on performing a service for the customer rather than on being public spirited on behalf of either the public or the state” (see note 8) . In pursuit of  profits and market share, major firms reward senior personnel for completing audits in shorter time. Strict time budgets are devised and junior staff are pressurised into completing audit in shorter time. Everyone connected with audit knows that audit cannot be properly completed within the allocated time. But the hope is that audit trainees would work evening and week-ends, without any payment, to complete the audit. The audit work is repetitive, boring and time consuming. Many trainees are not keen to work week-ends and evening for free. So they falsify audit schedules (see note 9) . From what appears to be very tidy set of working papers, audit partners cannot tell whether a proper audit has actually been carried out. The JDS report on Maxwell shows no interest in such matters. Consequently, audit failures remain institutionalised.

Overall, the verdict on the Maxwell auditors amounts to the usual feather-duster approach to auditor regulation. The punishment will not curb audit failures. The JDS has squandered another opportunity to examine the institutionalisation of audit failures.

1. For further information see, Sikka, P. and Willmott, H., "Illuminating the State-Profession Relationship: Accountants Acting as Department of Trade and Industry Investigators", Critical Perspectives on Accounting, Vol. 6, No. 4, 1995, pages 341-369.
2. Department of Trade and Industry, International Learning Systems Corporation Limited; Pergamon Press Limited (interim report), London, HMSO, 1971; Pergamon Press Limited (a further interim report), London, HMSO, 1972; Maxwell Scientific International, Robert Maxwell & Co Ltd; Pergamon Press Limited, London, HMSO, 1973.
3. For further details of the life and times of Robert Maxwell, see Bower, T.,  Maxwell: The Final Verdict, London, Harper Collins, 1996; Davies, R., Foreign Body: The Secret Life of Robert Maxwell, London, Bloomsbury, 1995.
4. House of Commons Social Security Committee, The Operation of Pension Funds, Second Report, London, HMSO, 1992.
5. After the death of Robert Maxwell, the Department of Trade & Industry appointed inspectors to investigate the fraud. Some eight years later, the report has still not been published.
6. Under critical public gaze, many of the Maxwell advisers, including, banks, auditors and lawyers raised money to mitigate the hardship suffered by Maxwell’s pensioners.
7. So how good were the firm’s training policies and procedures?
8. Hanlon, G., The Commercialisation of Accountancy, London, St. Martin's Press, 1994, p. 150.
9. For evidence see, Otley, D.T. and Pierce, B.J., Auditor Time Budget Pressure: Consequences and Antecedents, Accounting, Auditing & Accountability Journal, Vol. 9, No. 1, 1996, pp. 31-38; Willett, C. and Page, M.,  A Survey of Time Budget Pressure and Irregular Auditing Practices amongst Newly Qualified UK Chartered Accountants, British Accounting Review, Vol. 28, No. 2, 1996, pp. 101-120.