On 28 July 2022, the Financial Reporting Council set out its key observations arising from the audit investigations it carried out for the year ending 31 March 2022. At a glance, the FRC Annual Enforcement Review 2022 highlights that:
• There are 47 current investigations.
• During the year, 15 investigations into auditors, accountants and/or actuaries were opened;
• 24 cases were resolved through ‘constructive engagement’;
• 13 cases were resolved with settlement;
• one case was resolved through tribunal proceedings;
• three cases were resolved with no further action;
• £46.5 million in financial sanctions (before settlement discount) were issued.
• There was a 23% growth in the FRC’s enforcement division.
• Recurring themes in investigations included a lack of scepticism and insufficient audit evidence. The tribunal’s report on Silentnight highlighted failures to act with honesty, integrity and objectivity.
Overall, the review highlights that, whilst the number of cases opened during the year was down by 27%, the FRC has shown an increased capacity and willingness to pursue large and complex audit investigations and has applied a more tailored and cooperative approach to the resolution of cases referred to it. In particular:
Although fewer cases were dealt with during the year as compared with the previous year, more sanctions were issued, and a higher proportion of such sanctions were non-financial, reflecting the FRC’s focus on tailoring sanctions in order to more effectively help to deter repeat offending.
During the year, the FRC imposed 87 individual sanctions, 25 of which were financial (for example, fines or waivers of client fees) and 62 of which were non-financial (for example, reprimands or exclusion from membership of professional bodies).
This represents a significant increase (more than 100%) for the year when compared with the previous year’s eight financial sanctions and 25 non-financial sanctions.
The FRC has continued to focus on developing the ‘constructive engagement’ process as an effective and efficient alternative to the escalation of cases to investigation where appropriate. This process involves cooperation between the firm subject to the referral and an appointed case examiner, sometimes with the assistance of an independent team appointed by the firm, followed by agreement on appropriate remedial actions.
Preparing for ARGA
The FRC’s enforcement division has grown by 23% in order to support its increased investigation activity. The activity reported in the review is reflective of the increased oversight and enforcement role that the FRC is adapting to. This is in anticipation of the FRC’s transition to a more active and more empowered regulatory body to be known as the Audit, Reporting and Governance Authority (ARGA). The growth and increased action by the FRC was signalled in its Three-Year Plan 2022-2025. Whilst the review focuses on statistics relating to investigations concerning audit practices, it provides an insight as to the increased regulatory scrutiny that organisations can expect from the newly empowered FRC/ARGA over the coming years.
The FRC also takes the opportunity in the review to reiterate the fundamental requirements of integrity and objectivity. The review notes that, out of 12 audit investigations which involved FTSE or AIM-listed companies and which resulted in sanctions being issued, ten concerned auditors who failed to obtain sufficient appropriate audit evidence, performed parts of the audits without sufficient professional scepticism, and/or failed to document their workings properly.
The FRC accordingly reminds us in the review that the purpose of an audit is to give reasonable assurance to users of the financial statements that the amounts and disclosures contained are not materially misstated, and emphasises throughout the review the importance of objectivity and integrity in audit.
As for future areas of focus, the FRC flags that it will be paying particular attention to the impact of risks and uncertainties from climate change and geopolitical events on the work of preparers, auditors and actuaries and, in particular, will be focusing on deficiencies in areas where other parts of the FRC have issued commentary and guidance.
• Audit firms may benefit from revisiting the less technical aspects of their training and emphasising the merits of approaching audit with scepticism, objectivity and integrity.
• Preparers, auditors and actuaries should have close regard to the various pieces of guidance concerning auditing, governance and reporting practices issued by the FRC and cross refer to these when carrying out their work to ensure no material gaps or omissions are made which may later be picked up by the FRC’s own audit.
Click here for the FRC Annual Enforcement Review 2022
This article was produced in association with White & Case UK’s Public Company Advisory team. Read their original alert here.