FRC Launches Consultation on New Routes to Resolution Under the Audit Enforcement Procedure

The Financial Reporting Council (FRC) has launched a consultation on proposed reforms to its Audit Enforcement Procedure (AEP), aiming to introduce greater flexibility and proportionality in how audit concerns are addressed. Since its inception, the AEP has faced criticism, particularly from mid-tier firms, for its limited adaptability to cases of varying complexity and seriousness. These concerns have been especially pronounced among firms encouraged by the FRC to enter the Public Interest Entity (PIE) audit market to foster competition.
 

Many mid-tier firms have argued that the current AEP framework is not fit for purpose. It lacks sufficient flexibility in both approach and outcome, often resulting in disproportionately punitive fines and cost orders. Individual auditors, too, can find themselves in regulatory limbo during protracted investigations, which are frequently stressful and resource-intensive.

A step toward reform
 

The proposed changes aim to address these longstanding concerns by introducing a broader range of resolution options that better reflect the diversity of firms operating in the PIE audit space. Notably, the reforms seek to bridge the gap between minor infractions and serious misconduct, offering more nuanced pathways for resolution without defaulting to full-scale investigations.

Encouragingly, the proposals also include measures to expedite investigations, particularly in cases where firms acknowledge shortcomings and are willing to implement remedial actions. This could significantly reduce the time, cost, and stress associated with regulatory scrutiny.

We strongly encourage all stakeholders, especially those who have experienced the AEP first hand, to respond to the consultation. This is a vital opportunity to shape a more balanced and effective enforcement regime.

The full consultation paper is available online. Below, we outline the key proposed changes and their potential implications for audit firms and practitioners.

Proposed new routes to resolution
 

Under the current AEP, the FRC has two primary mechanisms for addressing audit concerns:

• Constructive engagement: A confidential process for resolving less serious issues collaboratively.
• Formal investigation: A more intensive process reserved for serious audit failures, often resulting in public sanctions.

Recognising the need for intermediate options, the FRC proposes three new resolution routes:

1. Published constructive engagement

This route builds on the existing constructive engagement model, with the key distinction that certain outcomes will be made public. While the names of audited entities and individual auditors will remain confidential, the FRC will maintain a public register of cases.

Firms may be required to cover the FRC’s costs, although the regulator retains discretion to waive these fees. This approach offers a balanced mechanism for firms that need guidance and oversight without the stigma of formal investigation. It also supports the FRC’s public interest mandate while preserving anonymity for individual auditors, potentially encouraging more auditors to enter the PIE market.

2. Accelerated procedure

Designed for cases where firms accept failings based on preliminary evidence, this route allows the FRC to bypass a formal investigation. Although the outcome will still be published, the process is significantly faster and less resource-intensive. This option is likely to be welcomed by firms seeking to avoid the high legal and internal costs associated with prolonged proceedings.

3. Early admissions process

Falling within the formal investigation framework, this process enables firms to conduct an internal review under FRC oversight, admit breaches, and resolve issues early. In return, firms may receive a sanction discount of up to 60%.

While many firms already undertake root cause analyses to demonstrate cooperation, this proposal formalises the process and offers a clear incentive for early engagement, potentially resulting in substantial financial savings.

Additional proposed changes
 

Revised investigation threshold

The FRC proposes a two-stage test for initiating investigations:

1. whether there are reasonable grounds to suspect a breach of a Relevant Requirement; and
2. whether it is in the public interest to open an investigation.

While this is unlikely to change the approach to opening investigations, it provides greater transparency around the Conduct Committee’s decision-making process.

Structural reforms

The FRC also plans to replace Case Examiners with Designated Officers, who will conduct initial case assessments. Unlike their predecessors, Designated Officers will not have discretion over outcomes unless no breach is suspected. The Conduct Committee will be responsible for all other decision making and for determining the appropriate resolution route.

Implications for audit firms
 

These reforms mark a significant shift toward greater transparency, efficiency, and proportionality, core pillars of the FRC’s Future of Audit Supervision Strategy (FASS). While some firms may be concerned about the reputational risks of published outcomes without full investigations, the benefits of faster resolution and reduced costs are substantial.

Firms should carefully assess their options at the outset of any regulatory engagement. Those considering the early admissions route must ensure they have robust internal review mechanisms in place to support timely and effective cooperation.

For mid-tier firms aiming to expand their PIE audit portfolios, the broader range of resolution options is particularly welcome. These proposals signal a move to more equitable outcomes and may encourage greater participation in a market long dominated by larger players.

Next steps
 

The consultation is open until 9 January 2026, with the revised AEP expected to take effect in July 2026.

Firms currently under investigation or assessment should familiarise themselves with the proposed changes, as the new resolution routes are intended to apply retrospectively to cases opened before the implementation date.

We will continue to monitor developments closely and provide updates as the consultation progresses into the new year.

About the authors

Julie Matheson is a partner in the Regulatory Team. Her expertise lies in advising professionals and professional services firms, particularly in the accountancy, audit and built environment sectors, on regulatory compliance, investigations and enforcement proceedings, including a focus on sexual misconduct in the workplace issues.

Jenny is a Legal Director in the Regulatory Team. She specialises in actuarial, accountancy and financial services regulation, and is experienced in advising regulated individuals and firms as well as acting on behalf of professional regulatory bodies.