PwC has been fined £1.4 million and “severely reprimanded for its misconduct” in relation to its reports to the Financial Services Authority on the compliance by JP Morgan Securities Limited (JPMSL) with the FSA rules relating to client money. The Accountancy & Actuarial Discipline Board (AADB) Tribunal’s Decision is here and the AADB press release is here.
PwC was the auditor of JPMSL in the years 2002 to 2008. As part of that role, PwC reported to the FSA in respect of the compliance by JPMSL with the rules relating to the segregation of client money by JPMSL (the CASS rules). JPMSL conducted futures and options business and as a result handled large amounts of client money. The amount of client money held by JPMSL during the relevant years at any time ranged up to US$23 billion.
JPMSL and its parent bank JP Morgan Chase effected daily sweeps of the balances of segregated client assets into consolidated overnight accounts at JP Morgan Chase. The result was that client assets of JPMSL ceased temporarily to be segregated, and the reports of PwC to the FSA concerning the segregation of JPMSL’s client assets were in fact false. PwC failed to obtain sufficient evidence on which to base those reports and accordingly, in the words of the Tribunal, ”did not carry out its professional work…with due skill, care and diligence and with proper regard for the applicable technical and professional standards expected of it…”.
In the event of a Lehman-style collapse of either JPMSL or JP Morgan Chase, the result of this failure to segregate client assets would have been – at best – a long wait for clients before they could recover their funds. The Financial Times’ Lombard column today describes the £1.4 million fine as “disgracefully small…Tribunals are wasting everyone’s time if the maximum penalty feared by accountancy firms is the price a partner might pay for a London crash pad”.
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