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FIND OUT MOREPartner Paul Brehony comments on the record fines against audit firms imposed last year by the Financial Reporting Council (FRC), the UK's corporate governance regulator. Paul's comments were published in Compliance Week, 23 January 2024, and can be accessed here.
Do the latest figures indicate that the FRC is becoming more aggressive in its regulation, following criticism over the slow pace of its investigations?
"The FRC’s imposition of record fines in 2023, reported by Thomson Reuters, have been making headlines recently, but were actually published last August in the FRC’s Enforcement Review. At first blush, pre-discount fines of GBP 40.5m would suggest the FRC is increasingly flexing its muscles. A number of market commentators see this as an indicator of greater aggression from the regulator, in part prompted by criticism of what in cricket terms would be its ‘slow over rate’, with investigations often taking more than 2 years from start to finish. Whilst this thesis is superficially attractive, the data available sends mixed messages. First, the GBP 40.5m figure has to a large extent been distorted by KPMG’s record fine arising from the Carillion debacle. FRC recruitment has nearly doubled since 2018, but the number of investigations initiated in 2023 were the lowest to date (down a third from the previous year) and the number of cases closed with no further action were up noticeably. Interestingly, in relation to the alleged slow pace of its investigations, the FRC’s performance against its own key performance indicator of 2 years (to conclude an investigation from start to finish) improved significantly (albeit with altered metrics)."
Is it likely that another Carillion-sized fine is on the horizon?
"Again, the messages from the data are mixed. Of the emerging themes the FRC Report identified, integrity failings and ‘going concern’ leapt out as those that might result in further material regulatory fines. When referencing the fines imposed on KPMG in Carillion and Silent Night matters the Reports states: “Unsurprisingly, in both years, these cases resulted, by some margin, in the largest financial sanctions imposed by the FRC, underlining the seriousness of integrity failings and the continuing spotlight on ethical standards”. Given the pressures placed on businesses by current economic fragility, integrity failings and going concern issues remain very much in the spotlight and any findings in either respect could very well result in significant, headline-grabbing fines. Across the FRC’s current portfolio of 38 open investigations, 32 relate to audit work and, of the new investigations opened last year, 75% relate to Big Four firms, a big change from last year, so never say never.
Against this, The FRC’s recent report on Tier 1 audit quality states, “overall audit quality continues to improve at the largest audit firms based on the results of our individual audit quality inspections," which would suggest the audit profession is starting to learn recent lessons albeit certain stubborn themes such as a lack of professional scepticism remain featured."
What are the implications for the accountability of audit firms, more broadly?
"Key messages from the FRC are that they expect audit firms to be proactively cooperative. They expect constructive engagement, and a more collaborative relationship is expected going forward and self-reporting remains encouraged and incentivised by significant financial discounts."
