In June 2016 the Financial Reporting Council (FRC) became the competent authority for audit in the UK. The Audit Enforcement Procedure, which became effective on 17 June 2016, reflects the FRC’s responsibility for monitoring the quality of audits. Under the Audit Enforcement Procedure, the FRC carries out investigations, enforcement and sanctioning in connection with audits.
These frequently asked questions aim to assist auditors who are the subject of or are otherwise involved in an FRC investigation under its Audit Enforcement Procedure, including FRC interviews. However we would recommend seeking tailored advice from a lawyer experienced in FRC proceedings at the earliest opportunity to ensure the best outcome.
What matters may be looked at under an FRC investigation?
An FRC investigation will focus on matters relating to audits of:
- Public Interest Entities (PIEs), being listed entities, credit institutions and insurance undertakings;
- AIM-listed companies with a market capitalisation in excess of €200m; and
- Lloyds Syndicates.
Where there are concerns relating to audits of other entities, these will often result in an ICAEW investigation, ACCA investigation or ICAS investigation. The FRC can, however, reclaim an investigation from a Recognised Supervisory Body, such as the ICAEW, if it chooses to do so.
Who can be the subject of an FRC investigation under the audit enforcement procedure?
FCA approved individual statutory auditors and statutory audit firms.
Who can make a complaint?
Anyone can make a complaint or provide information to the FRC, for example, another regulator, a member of the public or Parliament. The FRC can also identify issues for investigation from press or media reports.
What happens once a complaint has been received?
A Case Examiner will conduct initial enquiries and will determine if the information amounts to an allegation. The Case Examiner may seek at this stage to resolve issues through constructive engagement where appropriate. This is likely to be applicable for minor breaches. If the Case Examiner considers that the information amounts to an allegation and the matter has not been resolved through constructive engagement then the matter will be referred to the FRC’s Conduct Committee which then decides if the Executive Counsel should commence a formal FRC disciplinary investigation. An allegation will be found where the information raises a question as to whether there has been a breach of a ‘Relevant Requirement’ (see below).
What amounts to a breach under the Audit Enforcement Procedure?
A Relevant Requirement is essentially any breach of the relevant standards for the conduct of statutory audits. This encompasses the standards set out in the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR 2016) as well as other requirements under other legislation such as Parts 16 and 42 of the Companies Act 2006.
The threshold is lower under the Audit Enforcement Procedure than the test for misconduct under the FRC’s Accountancy Scheme (which requires you to fall “significantly short” of the standards reasonably expected). It is intended to capture minor breaches as well as serious breaches that would have previously been classed as misconduct.
The Conduct Committee will consider if there is a “good reason” to investigate. The FRC’s Conduct Committee guidance provides a non-exhaustive list of examples of good reasons to investigate including the potential to damage public confidence in the audit profession or failure in regulatory compliance processes.
Do I have to cooperate with an FRC investigation?
The FRC has powers under the Audit Enforcement Procedure to require any statutory auditor or statutory audit firm to co-operate with an FRC investigation, including by attending an FRC interview. It can also serve a notice requiring you (or any statutory auditor/audit firm) to provide information which relates to work undertaken in respect of the statutory audit of the annual accounts or consolidated accounts of any audited person.
In cases involving PIEs, the Executive Counsel now has the statutory power to enter premises at any reasonable time to carry out on-site inspections of audit work or audit firms. It also has the power to issue notices to specified third parties to provide documents. Those third parties would include the audit client itself.
If you fail to engage with the process and do not attend case management meetings or the hearing (should there be one), then the Chair or Tribunal can still continue in your absence if they are satisfied notice was properly given and it is fair in the circumstances.
Is it possible to agree a settlement with the FRC?
Yes, there are three main windows for early resolution before the matter reaches the FRC disciplinary Tribunal, namely:
- constructive engagement at the pre-investigation stage;
- at the Executive Counsel decision stage; and
- at the Enforcement Committee stage.
Discounts can be offered for admissions and settlement, for example if the matter is resolved prior to the Executive Counsel’s Decision Notice being issued or accepted, a discount of between 25% and 35% will be offered.
What happens during the FRC investigation?
The Executive Counsel’s investigation will be conducted by an in-house team of lawyers and forensic accountants. They will ultimately prepare an Investigation Report. At the conclusion of the FRC investigation, the Executive Counsel will issue a Decision Notice which will set out any adverse findings and a proposed sanction. If the findings and sanction are accepted by the person who is under investigation, the process will end there.
If the matter is not concluded at the Investigation stage, then it may be referred to the Enforcement Committee to reach a decision on the findings and sanction. In some circumstances a case can go directly from the investigation stage to a Tribunal.
Will anything be made public at this stage?
The Conduct Committee will decide whether to publish the fact that an FRC investigation has been opened. If a sanction is proposed at the end of the investigation then publication of this decision is mandatory. If no sanction is proposed then the FRC has discretion as to whether or not to publish actions taken at the investigation stage.
Does the Respondent have a chance to respond?
Within 14 days of the FRC investigation being concluded, the Respondent will be sent the Initial Investigation Report. The Respondent will have 56 days from receipt of the report (or other such period as agreed by the Executive Counsel) to make representations. The Executive Counsel will then have 56 days to finalise the Investigation Report.
Can an interim order be imposed?
Yes, interim orders can be determined at any stage before issuing the Final Decision Notice.
If you fail to make representations within 56 days of receiving the Initial Investigation Report then the Case Examiner may refer the matter to the Enforcement Committee to consider imposing an interim order.
What happens once the FRC investigation has finished?
When the Investigation Report is finalised, the Executive Counsel will decide whether you are liable for enforcement action. If an adverse finding is made, the Executive Counsel will set out the proposed sanction and proposed amount payable in respect of FRC’s costs in a Decision Notice.
If the Respondent agrees to the Decision Notice within 28 days, the Executive Counsel will issue a Final Decision Notice. Failure to agree all or part of the notice within 28 days will result in referral to the Enforcement Committee.
The Enforcement Committee will then decide, in private, if the Respondent is liable for enforcement action, and, if so, will provide details in a Decision Notice. If the Respondent agrees the Decision Notice, the Enforcement Committee will issue a Final Decision Notice. Failure to agree the Decision Notice within 28 days will result in the matter being referred to the Tribunal.
What happens at the FRC disciplinary tribunal hearing?
The hearing is held in public, unless the Chair or Tribunal decides that holding it in public would prejudice the interests of justice in which case all or parts of the hearing can be heard in private.
At the hearing, the Tribunal will consider preliminary legal arguments and the Respondent will then indicate if any admissions are made. The Executive Counsel will then open the case and present the FRC's supporting evidence. The Respondent will have an opportunity to present his/her evidence before the Tribunal announces its decision. A Tribunal is not bound by any earlier Decision Notices (unless parties agree otherwise). At the conclusion of the hearing the Tribunal will issue a Final Decision Notice which will set out its findings and any sanctions.
What sanctions can be imposed during an FRC disciplinary?
The Executive Counsel, the Enforcement Committee and the Tribunal may impose the following:
- a notice requiring you to stop the conduct giving rise to the breach;
- publish a statement requiring you to stop the conduct giving rise to the breach;
- order you to mitigate the effect or prevent the reoccurrence of the breach;
- temporarily prohibit you for up to three years from conducting statutory audits and/or signing audit reports;
- permanently prohibit you from conducting statutory audits and/or signing audit reports;
- declare that the statutory audit report does not satisfy the relevant requirements;
- order that you waive or repay client fees paid;
- temporarily prohibit you for up to three years from being a member of the management body of a firm;
- temporarily prohibit you for up to three years from acting as a director of or being concerned in the management of a public interest entity;
- a financial penalty;
- exclusion as a member of a Recognised Supervisory Body.
A costs award may also be made requiring the statutory auditor or statutory audit firm to contribute to the costs incurred by the FRC.
Can I appeal the FRC disciplinary decision?
Yes, you can appeal the Tribunal’s Final Decision Notice under certain grounds. You must lodge a notice of appeal in writing within 28 days of the issuing of the Final Decision Notice in order to appeal. The Appeal Tribunal will then have 14 days to consider whether to give permission to appeal. The grounds for appeal include: the decision was wrong in law, unfair because of serious procedural irregularity, irrational, made without significant and relevant new evidence, or (when appealing sanctions only) manifestly unreasonable.
You can also appeal any Interim Order imposed by the Enforcement Committee or the Enforcement Committee’s Final Decision Notice.
Are decisions made public?
Yes, the FRC must publish the following:
- the final decision notice of the Executive Counsel;
- the final decision notice of the Enforcement Committee;
- the final decision notice and report of the Tribunal;
- the final decision notice and report of the Appeal Tribunal;
- any decision in relation to an Interim Order.
The mandatory announcements are published as soon as reasonably practicable i.e. immediately after the person sanctioned has been informed of the decision. The FRC must include the identity of the person sanctioned except where:
- the person is an individual and the competent authority considers that publication of personal data would be disproportionate;
- publication would jeopardise the stability of financial markets;
- publication would jeopardise an on-going criminal investigation; or
- publication would cause disproportionate damage to any institution or individual involved.
The FRC also has discretion as to whether to make announcements on actions that do not lead to sanction, for example decisions to accept undertakings rather than sanctions.
The FRC will usually include an acknowledgement if you have cooperated and provide details of any discount applied for early settlement.