The Financial Reporting Council (FRC) is the competent authority for audit in the UK. The Audit Enforcement Procedure (AEP) reflects the FRC’s responsibility for monitoring the quality of audits. Under the AEP, the FRC carries out investigations, enforcement and sanctioning in connection with audits.
These Frequently Asked Questions aim to assist auditors who might be the subject of or otherwise involved in an FRC investigation under its AEP.
It is essential to seek 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), namely 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 investigation by the relevant Recognised Supervisory Body (RSB), such as the ICAEW, ACCA, or ICAS. The FRC can, however, reclaim an investigation from an RSB if it is in the public interest to do so.
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Who can be the subject of an FRC investigation under the AEP?
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Who can make a complaint?
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What happens once a complaint has been received?
The complaint will be sent to a FRC Case Examiner. They will decide whether the information raises a question as to whether there has been a breach of a ‘Relevant Requirement’ (see below). The Case Examiner has powers to make inquiries and obtain specialist advice in order to assist them in their decision.
If the Case Examiner considers that the information raises a question as to whether a Relevant Requirement has been breached, there are several options available to the Case Examiner. They can determine to:
- take no further action;
- arrange for Constructive Engagement with the statutory auditor or statutory audit firm (usually for low-level, minor and technical breaches of the Relevant Requirements);
- refer the matter to Executive Counsel to consider making an application for an Interim Order; or
- refer the matter to the Board.
If the matter is referred to the Board, the Board will determine whether:
- to direct the Case Examiner to attempt to resolve the matter through Constructive Engagement;
- there is good reason to investigate the matter; or
- no further action is to be taken on the matter.
If the Board decides that there is good reason to investigate the matter, it will determine the scope of the investigation, then either refer the matter for investigation to the Executive Counsel or direct the investigation be delegated to the appropriate RSB.
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What amounts to a breach under the Audit Enforcement Procedure?
A breach under the Audit Enforcement Procedure is referred to as a breach of the Relevant Requirements. This is essentially any breach of the relevant standards for the conduct of statutory audits.
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 Board will consider if there is a “good reason” to investigate. This includes, for example, where the conduct has the potential to damage public confidence in the audit profession, the potential to damage investor confidence in the truth and fairness of the financial reporting of an entity, or concerns a failure to adhere to ethical standards.
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What happens during the FRC investigation?
If the matter is referred for investigation, the Board shall send the Executive Counsel and the Respondent a Notice of Investigation. The Notice will be copied to the Respondent’s RSB.
The Executive Counsel’s investigation will be conducted by the Enforcement Division’s forensic accountants and lawyers. They have powers throughout the investigation to require information or documents from any statutory auditor or statutory audit Firm, to request any specialist advice, to request experts to carry out verifications or investigations, to require the auditor or firm to co-operate with the investigations (including attending for interview), or to request from any other person information that might be material to an investigation.
The investigation will culminate in preparation of an Investigation Report.
Do I have to cooperate with an FRC investigation?
The FRC has powers under the AEP 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 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 could 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. Failure to attend the hearing, or engage in the process at all, risks the decision maker drawing an adverse inference from your silence. It may be inferred that the failure to engage is because there is no reasonable explanation for the alleged conduct, or that an explanation would not stand up to proper scrutiny.
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Is it possible to agree a settlement with the FRC?
Settlement discussions can be entered at any time after the Notice of Investigation is issued but before the Tribunal has issued a Final Decision Notice.
Significant discounts to fines are potentially available for early admissions and settlement.
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Does the Respondent have a chance to respond?
Following completion of the investigation, Executive Counsel will provide to the Respondent an 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 written representations.
Executive Counsel may take into account a failure to make representations when determining whether a Respondent should be liable for Enforcement Action.
Can an interim order be imposed?
Yes, the Tribunal can make an Interim Order following an application by the Executive Counsel (either on behalf of the Case Examiner or on its own behalf) or on the Tribunal’s own volition. It can be made at any stage before issuing a Final Decision on Sanction and Costs.
An Interim Order can only be made if there is a hearing to determine whether the order should be made, or by agreement of the parties. Interim Order hearings will be held in private.
Will anything be made public during the investigation?
The Conduct Committee will decide whether to publish the fact of its decision to investigate. The Conduct Committee will consider whether such publication is necessary in all the circumstances, and any potential prejudice to the subject of an investigation is outweighed by the factors in favour of publication.
When determining whether publication is necessary in all the circumstances, the Conduct Committee must consider that an announcement will (among other things):
- help to maintain public confidence in statutory auditors and the regulation of them;
- protect users of financial statements;
- protect investors;
- help prevent malpractice that is potentially widespread;
- contribute to the effectiveness of the investigation; or
- help allay concern, contain speculation or rumour.
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What happens once the FRC investigation has finished?
The FRC investigation will culminate in preparation of an Investigation Report.
The Respondent has the opportunity to make written representations on the Investigation Report.
After consideration of the representations, Executive Counsel will decide whether the Respondent has breached any Relevant Requirements, and if so, whether the Respondent should be liable for Enforcement Action.
If the Respondent is liable for Enforcement Action, Executive Counsel will issue a Proposed Decision Notice to the Respondent. The Proposed Decision Notice will include the breaches of the Relevant Requirement(s) with reasons, the proposed sanction(s), a proposed amount payable in respect of Executive Counsel’s costs, and an invitation to the Respondent to provide written agreement to all or part of the Proposed Decision Notice within 28 days.
If the Respondent agrees to the Proposed Decision Notice, an Independent Reviewer will be appointed to consider the Proposed Decision Notice. The Independent Reviewer will determine whether it is appropriate to issue it as a Final Decision Notice.
If the matter is not resolved by way of agreement to the Proposed Decision Notice (for example, if the Respondent fails to respond to the Proposed Decision Notice within the period specified in it), the matter may be referred to the Tribunal.
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What happens at the FRC disciplinary tribunal hearing?
The Tribunal hearing is held in public, unless the Chair or Tribunal decides that holding it in public could prejudice the interests of justice, or that a private hearing may otherwise be in the public interest. If so, then 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 their evidence before the Tribunal announces its decision. Witnesses may be called and may be examined by the party calling them, cross-examined and questioned by the Tribunal. A Tribunal is not bound by any previous Proposed 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 on liability. A separate hearing for sanctions and costs will then be arranged at the earliest opportunity.
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Do I need to attend the FRC Tribunal hearing?
You are not required to attend the hearing, but the Chair or Tribunal may continue in your absence if it is satisfied that notification of the Hearing was properly given and it is fair in all the circumstances to do so. As above, failure to attend the hearing could result in the Chair or Tribunal drawing adverse inferences from your absence.
What sanctions can be imposed during an FRC Tribunal hearing?
Executive Counsel and the Tribunal may impose the following sanctions:
- a notice requiring you to stop the conduct giving rise to the breach;
- publish a statement which may take the form of a reprimand or severe reprimand;
- 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 that is eligible for appointment as a statutory auditor;
- 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.
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Can I appeal the FRC Tribunal decision?
Yes, you can appeal the Tribunal’s Final Decision Notice under certain grounds. You must lodge a Notice of Appeal within 28 days of the issuing of the Final Decision Notice. The Notice of Appeal must be in writing, identify the finding and/or appealed against, and state the ground of appeal.
Any appeal can only be made on the grounds specified in the AEP. Such grounds include that the decision was wrong in law, unfair because of a serious procedural irregularity, irrational, or was made without significant and relevant new evidence which could not have been adduced previously, or was manifestly unreasonable.
You can also appeal any decision to impose an Interim Order.
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Are decisions made public?
Yes, the FRC must publish the following mandatory announcements:
- the Final Decision Notice issued by Executive Counsel;
- the Final Settlement Decision Notice issued by Executive Counsel;
- the Final Decision Notice on Sanction and Costs issued by the Tribunal; and
- the Final Decision Notice issued by the Appeal Tribunal.
The FRC is required to publish mandatory announcements are published as soon as reasonably practicable immediately after the person or firm sanctioned has been informed of the decision.
The FRC must include the identity of the person or firm sanctioned except where:
- the person is an individual and publication of personal data would be disproportionate;
- publication would jeopardise the stability of financial markets;
- publication would jeopardise an ongoing 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 relate to sanction, for example, the commencement of investigations under the AEP or the outcome of such investigations where a sanction has not been imposed.
The FRC will usually include an acknowledgement if you have cooperated and provide details of any discount applied for early settlement.
