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The Financial Reporting Council (FRC) has announced it has resolved a “record” number of cases through the greater use of constructive engagement.
It comes as the authority has published its second Annual Enforcement Review, which highlighted audit quality improvements through both constructive engagement, as well as the wider deployment of tailored non-financial sanctions in cases where enforcement action has been required.
According to the group, constructive engagement has provided a basis for “taking swift and targeted remedial action” in less serious cases, to allow causes of failures to be addressed with the risks of repetition minimised.
Last year, the FRC’s Case Examination team opened 88 cases, marking a 90% increase on the year prior, and successfully resolved 31 of these cases through constructive engagement.
Where formal enforcement action has “proved necessary”, a wide range of non-financial sanctions have been introduced, including the creation of an Ethics Board at a ‘Big Six’ firm, mandated improvements to policies and procedures, the requirement for firm-wide training, the monitoring of regional offices, two undertakings to suspend accountancy membership and a lifetime prohibition on signing audit reports.
According to the FRC, these measures do not replace financial sanctions, which remain an “important tool for driving improved behavior”. In addition, financial sanctions imposed during the year totalled £16.5m before settlement discount.
Elizabeth Barrett, FRC executive counsel and executive director of enforcement said: “Given the detrimental impact audit failure can have on investor and wider stakeholder confidence it is critical that when audit standards are not met or ethical failures occur, they are identified and rectified.
“This year’s AER shows an increased use of constructive engagement, to provide a timely and proportionate way of addressing deficiencies and the wider deployment of non-financial sanctions to drive audit quality. The overall results for the year also reflect the impact of a larger and more effective enforcement division.”
