New non-financial conduct reporting requirements for the big six auditing firms

The FRC has written to six of the largest audit firms asking for internal governance documents revealing how they deal with non-financial (mis)conduct. The review arises as part of the FRC’s Audit Firm Monitoring and Supervision (AFMAS) responsibilities. The framework focuses on five key pillars: leadership and governance, values and behaviours, business models and financial soundness, risk management and control and audit quality.

What has the FRC asked for?

The FRC has asked the firms to handover their policies and procedures for internal whistle-blowing, grievances, disciplinary matters and complaints from individuals outside the firm, by 30 August 2019. The stated aim is to help the FRC:

understand and assess the design and effectiveness of the policies and procedures the firms have in place to facilitate the reporting of and response to nonfinancial conduct matters”.

It has also stipulated that the documents the firms provide should specifically cover bullying and harassment, discrimination and alcohol/substance abuse policies, and has directed the firms to provide extracts from intranet pages which guide partners and staff on policy compliance, as well as Board reporting packs on these policies and procedures, where applicable.

Why are they asking for this information?

The FRC explained to the firms that it wants to understand how firms deal with and respond to non-financial conduct, through the provision of internal documents and a new reporting requirement. In doing so they will assess how each firm’s policies and procedures are designed and whether they are effective in respect of non-financial conduct.

What else are firms required to do?

New quarterly reporting:

• The FRC has also asked the firms to meet a new quarterly reporting requirement for non-financial conduct complaints matters starting from 30 September 2019, with the aim of providing the FRC with assurance that the firms have effective monitoring arrangements in place.
• A template form for reporting was provided with the letter and the firms are being given until 11 October 2019 to report on the first period ending 30 September 2019.

Existing reporting requirements:

• The firms are expected to continue to comply with their existing reporting requirement to notify the FRC of incidents which could pose a threat to the reputation of the firm, including non-financial conduct matters.

The impact?

The documents requested by the FRC together with the new reporting requirements will give the FRC insight into the effectiveness of the policies and procedures in dealing with and responding to non-financial (mis)conduct.

We may in the future then see the FRC introduce new guidance or other requirements on firms if it considers that the policies and procedures are ineffective and don’t meet best practice. This will particularly be so if the facts and figures which will come out of the reporting requirements demonstrate that the policies are ineffective, either from a preventative/educational aspect or from a responsive aspect. As is so often the case when a regulator conducts a thematic review such as this, we must sit and wait to find out what direction of travel any policy developments take after the results are in.

Further information

For further information on the issues raised in this blog post, please contact a member of our Regulatory team.

About the authors

Julie Norris is a Partner in the Regulatory department and specialises in advising in the health, professional services, legal and financial fields. 

Sophie Bolzonello is a Associate (Australian Qualified)  in the Regulatory department and specialises in advising regulated professionals on compliance, in investigations and in respect of enforcement action. 

This blog was also co-authored by Chris Coltart QC, at 2 Hare Court.