The Financial Reporting Council (FRC) is the independent disciplinary body for accountants and accountancy firms. It operates a disciplinary scheme for the accountancy profession which is independent of the professional bodies. The scope of the scheme is limited following the introduction of the Audit Enforcement Procedure.
These frequently asked questions aim to assist accountants and accountancy firms who are the subject of or are otherwise involved in an investigation under the FRC’s Accountancy Scheme.
However, we would recommend seeking tailored advice at the earliest opportunity, to ensure the best outcome.
What matters are looked at in an FRC investigation?
The FRC investigates complaints of misconduct where there appears to be important issues affecting the public interest in the UK. When considering whether the matter raises public interest issues, the following factors are taken into account:
- the impact on a significant number of people in the UK;
- the loss or potential loss of significant sums of money; and
- whether the conduct undermines confidence in financial reporting or corporate governance.
Who will be investigated in an FRC investigation under the FRC disciplinary scheme?
Members and member firms of the following professional bodies can be investigated:
- Institute of Chartered Accountants in England and Wales (ICAEW);
- Chartered Institute of Management Accountants (CIMA);
- Chartered Institute of Public Finance and Accountancy (CIPFA);
- Institute of Chartered Accountants in Ireland (ICAI);
- Association of Chartered Certified Accountants (ACCA);
- Institute of Chartered Accountants of Scotland (ICAS).
Who can make a complaint?
The FRC’s Conduct Committee can start an FRC investigation if there has been a referral from a professional body or they can also decide to pursue an investigation of their own accord.
What happens once a complaint has been received?
The Conduct Committee will decide whether the criteria for commencing an FRC investigation are met, i.e.:
- whether the case raises or appears to raise important issues affecting the public interest in the UK; and
- there are reasonable grounds to suspect that there may have been misconduct.
If so, the Conduct Committee will refer the case to the Executive Counsel and Enforcement Division to investigate. The Executive Counsel’s investigation will be conducted by an in-house team of lawyers and forensic accountants. The Executive Counsel may also instruct an external expert to provide an expert opinion and engage external Counsel to advise on the merits of the case.
During the course of the FRC investigation, you may be interviewed and asked to provide documentation. Prior to the interview, you should be provided with a copy of any documentation the FRC intends to rely on at the interview.
The interview will normally be recorded and a transcript prepared. You may be asked to provide further documents or information and attend further interviews.
What amounts to misconduct under the FRC Disciplinary Accountancy Scheme?
Under the scheme, misconduct is defined as any act or omission made in the course of your professional activities which falls “significantly short” of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member or Member Firm, or to the accountancy profession in general.
Do I have to cooperate with an FRC investigation?
The FRC requires that all members, including former members, must at all times fully cooperate with the investigation. Member Firms including former and successor Member Firms must use their best endeavours to ensure that every employee cooperates fully.
The FRC also has the power to require you to:
- provide information and any relevant explanations;
- provide oral and/or written evidence to a Tribunal;
- permit them to inspect and take copies of documents/information; and
- provide copies of documents and information at your own expense (to a reasonable extent).
Will anything be made public at this stage?
The Conduct Committee will decide whether the fact of an investigation and the outcome of the investigation should be published. Each decision by the Committee is made on a case-by-case basis. In deciding whether to publish the fact that an investigation is taking place, the Committee will consider the likelihood that the investigation will lead to a Formal Complaint.
Is it possible to agree a settlement with the FRC?
Yes, at any stage after the commencement of an investigation, but prior to any final determination of the Formal Complaint, it is possible for the Executive Counsel to commence settlement discussions in respect of part or the whole of any alleged misconduct. This is at the sole discretion of the Executive Counsel, having regard to the public interest.
Where terms of a settlement are agreed prior to the delivery of a Formal Complaint then a lawyer from the Tribunal Panel will be appointed to consider the proposed settlement agreement. If terms are agreed after the delivery of the Formal Complaint then they will be considered by the Tribunal. In both scenarios they will consider whether it is appropriate to enter into the agreement bearing in mind the purpose of the scheme i.e. they will consider public interest arguments. The Conduct Committee will be informed of the decision and reasons for the decision as soon as reasonably practicable and then you will be sent a notice of the decision. If approved, the settlement agreement will take effect from the next working day after the date on which the notice is sent.
The FRC offers discounts for settlement of a case, depending on the stage at which the matter is settled. For example if a case is settled prior to a Formal Complaint being served, there will be a reduction of between 20% and 35% in relation to any fine imposed. Early settlement may also help to limit any costs award, therefore there can be significant financial advantages in engaging in settlement negotiations.
Any settlement agreement will be published as soon as practicable unless this would, in the opinion of the Conduct Committee, not be in the public interest.
Can an interim order be imposed?
Yes, the Executive Counsel can make an application for an interim order to the Conduct Committee at any stage between making a decision to investigate and the making of a decision by the Disciplinary Tribunal. The Conduct Committee will serve a notice of the application on the Member or Member Firm and a Disciplinary Tribunal will be appointed to hear the application.
What is a Proposed Formal Complaint?
Once the FRC has completed its investigation, if the Executive Counsel considers that there is a realistic prospect of an adverse finding and a hearing is in the public interest, a ‘Proposed Formal Complaint' will be served. This will set out the charges that the FRC intends to bring against you, including a summary of the evidence obtained in support of each charge. You will not normally be provided with the documents obtained during the investigation.
You will have 8 weeks to make any representations based on the Proposed Formal Complaint. The Executive Counsel will review the representations and then decide whether or not to proceed with delivering the Formal Complaint.
What happens once I have been served with a Formal Complaint?
The Formal Complaint will set out the charges that will be considered by the Disciplinary Tribunal. This may differ from the Proposed Formal Complaint as the Executive Counsel may have withdrawn or amended the charges based on your representations or any settlement negotiations.
The matter will then proceed to a hearing, however you can continue to engage in settlement negotiations during this period. Prior to the hearing you will be able to serve any evidence you wish to rely upon at the hearing.
What are the potential outcomes of an FRC Disciplinary Tribunal hearing?
The Disciplinary Tribunal will either dismiss the Formal Complaint or make an adverse finding in respect of part or all of the alleged misconduct. Where an adverse finding has been made against a Member or a Member Firm, a Disciplinary Tribunal may impose a sanction.
For Members and Member Firms the following sanctions may be imposed:
- severe reprimand;
- fine of an amount specified by the Tribunal;
- waiver or repayment of client fees;
- order that a Member/Member Firm is not eligible for a practising certificate/registration/authorisation/licence for a specified period of time;
- order that a Member/Member Firm’s practising certificate/ registration/ authorisation/ licence be withdrawn or that it not be reinstated for a specified period of time.
Exclusion as a member for a recommended period of time is a further sanction which is only applicable to members, not member firms.
Fines are of an unlimited amount and can be significant. For example, in the recent proceedings in relation to the audit of Connaught plc, PwC was fined £5 million and the Audit Engagement Partner was fined £150,000. The Tribunal has complete discretion in respect of the amount of the fine, although the financial resources of the member/ member firm will be taken in to account when considering the appropriate level of the fine.
In the event of non-payment in full (including any interest) the Tribunal can order that a Member or Member Firm be excluded or be ineligible to practise for a prescribed period of time.
The Tribunal can also decide not to impose a sanction or may simply order the payment of costs if it considers this to be appropriate in all the circumstances.
What is a costs award?
In addition to any financial penalty imposed, the FRC can seek a contribution to the costs of its investigation. Costs awards in FRC cases can be significant; recent awards have been over £1 million where the matter has been determined by a Disciplinary Tribunal. It may therefore be in your interests to settle early before the costs escalate.
If the Tribunal dismisses the Formal Complaint, then it is open to you to ask for a costs award to be made in your favour. However, this is limited to legal costs reasonably incurred subsequent to the Formal Complaint being served. Such an order is rare given that the Tribunal’s discretion is restricted to circumstances where the Tribunal finds that no reasonable person would have pursued all or a substantial part of the Formal Complaint. The Tribunal will also consider if the order is necessary given the FRC’s public interest responsibility to investigate complaints.
Can I appeal the decision?
Yes, it is possible to appeal a decision of the Disciplinary Tribunal and, if permitted, have the Appeal Tribunal re-hear any of the witnesses and/or hear fresh evidence.
Are decisions made public?
Disciplinary Tribunals and Appeal Tribunals normally sit in public and will publish their decisions and reports unless this would not, in the opinion of the Conduct Committee, be in the public interest.