The Financial Reporting Council (FRC) means business. A slew of fines and investigations in the wake of the many distressed company stories of the last two years have shown that nobody – including the Big Four – is safe.
At a time like this, it’s worth reminding ourselves of what the regulator is for, what behaviour it targets, and what outcomes it can achieve. In pure monetary terms, it is no joke – tens of millions were levied in fines in the period described in its latest Annual Enforcement Review (AER).
Let’s start with its own mission statement: “We regulate auditors, accountants and actuaries, and we set the UK’s Corporate Governance and Stewardship Codes. We promote transparency and integrity in business. Our work is aimed at investors and others who rely on company reports, audit and high-quality risk management.”
The stats
At the end of July, the AER was published. Some of the main findings they decided to pick out for their press release (we’ll delve into the actual report shortly) are as follows:
- Record £43m of fines for misconduct and standards breaches
- Significant increase in number of concluded cases
- Non-financial sanctions such as exclusions and ongoing monitoring to address misconduct and improve behaviour
- A near trebling in annual fines, from £15.5m in 2017/18 to £42.9m in 2018/19
- Far greater use and range of non-financial sanctions, rising from 11 in 2017/18 to 38 in 2018/2019.
- Increased use of horizon scanning techniques to identify issues requiring investigation
- 25% in year growth in the Enforcement Division
This is a regulator on the ascendancy. We have drawn from the AER to give you the low-down on the powers themselves. The following is taken from the report itself verbatim.
Who can the FRC investigate and act against?
The FRC’s overarching mission is to promote transparency and integrity in business. Public confidence in business depends not just on regulators setting and monitoring standards but on those who fail to meet those standards being held to account where necessary. The FRC is, among other things, the UK Competent Authority for statutory auditors and the independent disciplinary body for accountants and actuaries in public interest cases.
It operates investigation and enforcement procedures (enforcement action) in relation to each of these groups, and is committed to taking firm, fair and timely enforcement action against those within its jurisdiction to protect the public, promote confidence in the profession, uphold standards and deter Misconduct.
Auditors – The FRC has responsibility for enforcement action in relation to audit firms and individual auditors.
Accountants – The FRC can also take enforcement action in respect of suspected Misconduct by individual accountants and firms of accountants, who are members of the professional accountancy bodies in relation to non-audit work in public interest cases. These individuals are often working within businesses preparing financial statements and other financial information.
Actuaries – The FRC can take enforcement action in respect of suspected Misconduct by individual actuaries who are members of the Institute and Faculty of Actuaries (IFoA) in public interest cases. The FRC has no jurisdiction over firms employing actuaries. The FRC currently has no power to investigate companies, or to take enforcement action or impose sanctions on individual directors who are not accountants.
When can it take action?
Enforcement action can be taken when there is a realistic prospect that a Tribunal will find that individuals and/or firms have engaged in Misconduct, i.e. conduct which falls significantly short of the standards reasonably to be expected of an accountant/accountancy firm/actuary, or which has brought, or is likely to bring discredit to the accountant/actuary or to their profession.
The threshold for opening investigations is that, in the opinion of the Conduct Committee, the matter raises or appears to raise important issues affecting the public interest in the United Kingdom and there are “reasonable grounds to suspect that there may have been Misconduct”.
The FRC can require information from accountants, accountancy firms and actuaries under the Schemes, and a failure to co-operate on the part of an individual accountant, actuary or accountancy firm may itself amount to Misconduct. However, there is no power under the Schemes to require information or co-operation from non-accountants, such as the audited entities and/or employers of the accountants/actuaries under investigation.
The Audit Enforcement Procedure (AEP)
Under the AEP, the FRC can investigate statutory auditors and audit firms in relation to audits of Public Interest Entities (PIEs), large AIM-listed companies and Lloyd’s Syndicates.
An investigation is opened where there is information which “raises a question as to whether there has been a breach of a relevant requirement” and the FRC’s Conduct Committee considers that there is a good reason to investigate. Enforcement Action (as defined in the AEP15) can only be taken if the investigation shows that there has been a breach of a Relevant Requirement under auditing or ethical standards.
This is a lower test than ‘Misconduct’ under the Schemes (Visit the report itself to read more about the ‘Schemes, Ed.). The AEP contains powers to require information from auditors and audit firms and, in the case of PIEs, from the audited entity and others involved in or otherwise connected to an audit. A failure to comply with these requirements can lead to the FRC applying to the High Court for an order to ensure that the information is provided, as happened in the case of Sports Direct. It can also amount to a criminal offence.
The sanctions it can mete out
The enforcement Schemes and the Audit Enforcement Procedure (AEP) each prescribe a range of sanctions that can be imposed following a finding of Misconduct or a breach of Relevant Requirements. These include:
- Unlimited fines;
- Reprimands or Severe Reprimands
- Orders designed to prevent recurrence, such as placing restrictions on the nature of work undertaken or clients represented, and education and training programmes;
- Waiver/repayment of client fees;
- Prohibition from conducting statutory audits/withdrawal of registration or practising certificate;
- Exclusions as a member of a professional body. Additional sanctions under the AEP include:
- Notice to cease or abstain from conduct giving rise to the breach of a Relevant Requirement (and publication of this);
- A declaration that the Statutory Audit Report does not satisfy the Relevant Requirements; – Temporary prohibition from being a member of the management body of an audit firm or a director of a PIE.
So there you have it, a brief roundup of what the FRC is about, under what circumstances it can begin to investigate, and the possible outcomes of being found breaking the rules.
Let’s finished with some words from the FRC’s executive counsel.
“The clarity and accuracy of financial reporting is of critical importance to us all. The significant increase in the number, range and severity of sanctions sends a clear message that where behaviour falls short of what is required, we will hold those responsible to account.
“Improved behaviour by those we regulate requires recognition that where failures occur their root causes must be identified, effectively addressed and reported to us. Where such co-operation occurs due credit will be given; where it does not, consequences will be severe.”
Food for thought.
