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The Financial Reporting Council (“FRC”) recently announced that it is intending to amend the Audit Enforcement Procedure (“AEP”) and is consulting on the proposed amendments.
With the consultation open until 7 October 2021, now is the chance for statutory auditors, audit firms, regulatory bodies and professional associations to have a say in what audit enforcement will look like over the coming years.
What is the FRC’s Audit Enforcement Procedure?
The FRC, as a competent authority is responsible for overseeing the regulation of statutory auditors and statutory audit firms who conduct audits of public interest entities (“PIEs”).
Through the FRC’s AEP, the FRC establishes how it will investigate those who conduct PIE audits and how it will impose and enforce sanctions.
The current AEP came into force on 17 June 2016 following a consultation on a draft version on 23 March 2016.
The FRC has explained that the proposed amendments in its latest consultation are intended to ensure a clearer, more effective and robust enforcement process with many amendments being minor in nature.
We discuss the more significant changes below. The details of the proposals are set out in the consultation document, available here.
The key proposed changes
The key changes here are introducing a number of new rules and modifying existing rules.
New rules 12 and 13 are designed to provide for the scope of an investigation to be amended where related breaches are suspected rather than having to open a new separate investigation.
Revised rules 16 and 17 will ensure investigations are less time intensive and remove the requirement for Executive Counsel to prepare an Initial Investigation Report. The Respondent auditor will instead have an opportunity to make submissions on the contents of an Investigation Report.
New rules 19 and 20 explicitly provide for Executive Counsel to pursue enforcement action against a Respondent when there has been a finding of a breach of a Relevant Requirement. New rules 23 – 28 provide that following a decision under rules 19 and 20, an independent person is required to approve the issue of a Final Decision Notice after a Proposed Decision Notice has been agreed between the FRC and the Respondent auditor.
Part 4, which provides for an Enforcement Committee stage, will be abolished as no cases have yet reached this stage since this Part has been in operation, and the FRC believes that the independent person role in rules 23 – 28 will provide sufficient independent oversight.
Under new rule 34, the Executive Counsel will be required to serve a document setting out the particulars of case against a Respondent along with any other factual evidence. This is a feature of many other regulatory and enforcement frameworks and ensures that the Respondent facing disciplinary action knows the case which is being brought against them, and has sufficient opportunity to make any admissions prior to the Tribunal hearing which, in our experience, can ultimately lead to an agreed outcome and a reduction in costs orders.
Under new rule 52, the Tribunal will be permitted to treat a finding or court-approved statement of fact made by other bodies or officers as prima facie evidence of fact in its own proceedings. This is an efficiency measure and again a process commonly built into other enforcement frameworks for expediency. This lessens the burden on the regulator to produce substantively the same documents and will result in cost efficiencies for all parties.
This is a new Part in the AEP which allows for settlement agreements with Respondents to be used to conclude enforcement proceedings. The FRC has explained that an independent person will have oversight and approval of such agreements. This is again a common feature of other regulatory and enforcement frameworks and is generally cost efficient and saves significant time for all parties. For example, the Solicitors Regulation Authority’s use of Regulatory Settlement Agreements is well-established and, where appropriate, enables matters to be resolved swiftly, efficiently, and at a proportionate cost.
Our views on the changes
The proposed changes appear to be designed to introduce new steps to make the AEP more efficient. This will ultimately have a positive impact in reducing the costs incurred by the FRC in bringing enforcement action, which will also benefit Respondents who will likely see a reduction in the amount of costs orders they may face.
Similarly, by introducing alternative methods of enforcement such as settlement agreements, Respondents will be able to participate in the outcome which is reached in relation to any enforcement action which is being taken.
Overall, the changes indicate a clear intention to streamline the AEP and make it more transparent and proportionate ahead of the FRC’s transformation into ARGA. As we observed from the FRC’s latest Annual Enforcement Review 2021, published last month (July 2021), the significant and planned growth in the FRC Enforcement Division suggests that it expects to see an increase in the number of cases it investigates and enforces against in the near future. Also observed from the review was an increased focus on Constructive Engagement and the greater use of remedial sanctions to improve audit quality. This notable shift towards early engagement and providing opportunities for remediation is a welcome one, and the proposed changes to the AEP, particularly in respect of opportunities for early settlement, strengthen this position further.
It is crucial that those who are subject to the FRC’s oversight take this opportunity to provide a response to the consultation. These changes can and may very well impact you over the coming years if you face Enforcement Action. The consultation is open for responses until 7 October 2021.
If you have any questions or concerns about the content covered in this blog, please contact a member of the Regulatory team.
Sophie Bolzonello is an associate, Australian Qualified, in Kingsley Napley’s Regulatory department. Sophie specialises in advising regulated professionals on compliance, in investigations and in respect of enforcement action. She also advises regulators on policy, governance, prosecutions and litigation.
Lucinda Soon is a professional support lawyer in the Regulatory team, and is responsible for knowledge management and practice development. She has previously advised individuals and organisations in the legal and accountancy sectors on authorisations, compliance, ethics, and regulatory policy, and formerly worked as a PSL in the General Counsel team at the Solicitors Regulation Authority. Lucinda is a keen advocate for mental health and well-being at work, and is currently pursuing a PhD in Organisational Psychology, where her research focuses on well-being in legal practice. She is also a Trustee of LawCare.
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