FRC publishes details of new audit enforcement procedure

The Financial Reporting Council (FRC) has published details of its new audit enforcement procedure (AEP), now that it is the designated competent authority following legislation to bring into effect the EU’s Audit Regulations and Directive (ARD) and has responsibility for investigations and disciplinary cases in relation to public interest entities (PIEs).

The AEP replaces the FRC’s existing sanctions procedure and disciplinary tribunal scheme and is intended to provide new administrative procedure where there has been breach of regulatory requirements which is aimed at promoting the early conclusion of enforcement cases.

Along with the new regulations, the FRC has also published feedback from its earlier consultation on the introduction of the AEP, which ended in early May and received thirteen responses – seven from audit firms, four from recognised supervisory bodies (RSBs) and one from an individual.

According to this document, a number of RSBs thought it was not appropriate for the AEP to permit the FRC to expel members from the RSBs. They also maintained that where the conduct committee has delegated a PIE investigation to an RSB under the AEP, the FRC should not be able to override the RSB’s finding on liability, when the matter is returned to the FRC for sanction.

In addition, the ICAEW disputed the FRC’s interpretation of the audit regulation’s prohibition against delegation of the sanctioning PIE enforcement matters.

In its response to the consultation comments, the FRC states: ‘As competent authority, the FRC has responsibility for all statutory audit regulation as set out in SATCAR 2016 but may delegate certain regulatory tasks to the RSBs.

‘Those delegations and the conditions under which they must be performed (including minimum conditions for the RSBs’ own enforcement procedures) will be set out in delegation agreements with each RSB, in line with SATCAR 2016 and the Secretary of State direction published thereunder. The FRC does not require delegate RSBs to apply the AEP when performing delegated enforcement tasks. The delegation agreements will be available on the FRC website on or around 17 June 2016.’

Among the sanctions listed in the FRC’s AEP are both the temporary prohibition, of up to three years' duration, banning the respondent from carrying out statutory audits and/or signing audit reports and a permanent prohibition, and similar sanctions banning the respondent either temporarily or permanently from  a member of the management body of a firm that is eligible for appointment as a statutory auditor, or from acting as a director of or being otherwise concerned in the management of a PIE.

The FRC sanctions also include the ability to exclude a respondent as a member of one or more RSB, plus financial penalties.

At the time of the consultation, the FRC indicated that any income from financial penalties levied following disciplinary proceedings would most likely be reserved for a ‘case costs’ fund. In the intervening period, SATCAR 2016 has been updated to require that financial penalties recovered by the FRC should be paid to the Secretary of State.

The FRC said: ‘We remain actively committed to exploring with Treasury the future prospects for such fines to be contributed to a case costs fund with a view to reducing the burden on the RSBs, protecting the competent authority from any question of undue influence as a result of enforcement funding continuing to be provided, indirectly, by the profession, and further developing a “polluter pays” regime.’

The FRC details on the AEP are here.
The consultation feedback is here.

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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