Paul Brehony examines the 2024-2025 UK FRC Enforcement Review in Thomson Reuters Regulatory Intelligence

For the past seven years, the Financial Reporting Council (FRC) has produced an annual enforcement review that details the regulator’s case assessment, investigation and enforcement activity. Whilst its most recently published review for 2024/25 was interesting of itself, more noteworthy perhaps was what the Report failed to address.

Whilst there were significant improvements in the turnaround time of investigations, in many respects the numbers were otherwise underwhelming; for example, in relation to new investigations opened and the level of fines year on year.  To some extent (as the Review asserts) this is explained by reference to improved cooperation and the impact of remedial action by the profession in response to historic record fines and adverse publicity.

The specifics

• Timeliness is noted as a particular focus with 90 per cent of applicable investigations now being completed or resolved within two years. This was up from 53 per cent in the previous year.
• Nine investigations were concluded by way of settlement last year, two were closed with no further action and 12 matters were resolved through constructive engagement.
• Beyond the achievement of dramatically reduced investigation timelines, there was a year-on-year decrease in ongoing investigations (down from 35 to 32) while regulatory headcount also declined – from 70 to 64 employees. Notably, the total of financial sanctions imposed was only GBP 14.5m, a reduction of 70 per cent from GBP 48.2m levied in the previous year.
• The FRC opened eight investigations last year, adding to the six cases opened in the previous year.
• In total, of the 32 open investigations, 27 concern audit and five concern professional accountants. Of the 27 audit investigations, 25 are under the Audit Enforcement Procedure (AEP), while two are under the Accountancy Scheme.

Beneath the headline data, it is clear that the regulator continues to focus on its core responsibility: to enhance public trust and confidence in the quality of audit, corporate reporting and governance. In many respects the FRC had done a good job in recent years in this respect in difficult circumstances.

Notwithstanding last year’s dip in fines, the collective reputation of the Big Four accounting and consulting firms in the UK is a long way from recovery given historic scrutiny  by the FRC. Cumulatively, they have been required to pay more than GBP 100 million in FRC fines over the past five years. As they look to safeguard their domestic standing, the sustained impact of hefty FRC fines still has an enduring impact.

Primarily, the surge in fines and audit failings among the Big Four arose from several years of enhanced FRC investigations, more robust enforcement action against them for historic mistakes, often accumulated and compounded over several years, and the FRC imposing higher fines.

Of some concern is that many of the failings identified historically in such cases are still recurring – “However, we continue to see failings in certain areas identified in previous years such as lack of professional scepticism.”

• The most common audit failings were lack of challenge of management and professional scepticism, insufficient audit procedures performed, and insufficient coaching, supervision and review.
• The most common accounting areas which arose in concluded investigations were: – failure to exercise professional scepticism, failure to obtain sufficient appropriate audit evidence and failures in audit documentation continue to feature heavily. Concluded investigations also featured issues relating to compliance with ethical requirements, compliance with laws and regulations, presentation and disclosure and matters relating to going concern.

Simultaneously, the audit sector in the UK has undergone significant cultural and structural change. Its continued commitment to self-improvement has been further underpinned by operational separation: first introduced in 2020, the Big Four have voluntarily split their UK audit and non-audit practices. When the process concluded last October, the FRC stated: “Throughout the three-year transitional period, all four firms have made significant improvements to their governance to prioritise the delivery of audit quality.”

Notably, this year’s review identifies “exceptional co-operation” by several firms and individuals during the course of FRC investigations. This includes self-reporting breaches of relevant requirements and volunteering additional information which had not been specifically requested, in order to advance the case team’s understanding of the facts.

The FRC highlights such behaviour as evidence of constructive engagement with regulatory expectations and reactive remedial actions (e.g. increased training, IT investment, and systems upgrades), which are beginning to yield positive results. The reward for such behaviour typically results in a 15 per cent discount on the level of fine imposed by the regulator.

Alongside examples of exceptional co-operation which evidence a commitment to self-improvement, the FRC continues to see persistent failings in some areas that had been identified in previous years (and as referenced above), such as a lack of professional scepticism and failure to challenge management effectively.

The elephant in the room

One notable omission from the latest FRC review is the Audit, Reporting and Governance Authority (ARGA), which has long been conceived as a much-needed replacement for the FRC. In 2018, the Kingman report was the first to recommend that the FRC be replaced by a stronger, statutory regulator “as soon as possible with a new independent regulator with clear statutory powers and objectives.”

By its absence from the wording of the review, the omission of ARGA transition and of audit reform now stands out as the elephant in the room.

Just over a year ago, on 17 July 2024, King Charles delivered the King’s Speech, which outlined the then newly-elected Labour government’s priorities for the year ahead. Prominent among its legislative priorities, and mentioned in the third paragraph of the Speech, was the draft Audit Reform and Corporate Governance Bill.

Once passed, this would create ARGA as a new accounting regulator to replace the FRC and assume its responsibilities for regulating audits, accountants and actuaries and setting the UK’s Corporate Governance and Stewardship Codes.

To overcome the FRC’s limited powers, including oversight of regulation of the accounting profession and local authority audit, it is anticipated that ARGA will receive enhanced investigatory and enforcement powers and have a wider remit, extending Public Interest Entity (PIE) status to the largest private companies.

In July, the UK Government announced a further delay to ARGA’s long-anticipated establishment.

Justin Madders MP, Minister for Employment Rights, Competition and Markets, Department for Business and Trade, stated in correspondence with Liam Byrne, Chair of the Business and Trade Committee that “due to the current volume of legislation before Parliament, the draft Audit Reform and Corporate Governance Bill will not be put forward for pre legislative scrutiny in this session”.

Instead, the letter adds, the UK Government intends to conduct “further consultation with a range of stakeholders in the coming months as we continue to refine our proposals”. Notably, the letter also highlighted the following:

“The oversight of the market has improved dramatically since Carillion, and we will ensure that these reforms take the next step to address the challenges of the future. We intend to continue to listen closely to business, ensuring that our reforms strike the right balance between oversight and assurance for investors, whilst not placing unnecessary additional burdens on business.”

In response, the Chief Executive of the Institute of Chartered Accountants for England and Wales (ICAEW) emphasised that “the government should bring the Audit Reform Bill forward now”, adding that it is central to the Government’s “correct prioritisation of a growth mission designed to attract capital and investment”.

The mood music has certainly changed since the King’s speech last July. Without any specific timetable in place, this provokes inevitable concern about the future direction of audit regulation and governance reform, and whether the establishment of ARGA is now deemed necessary, particularly if the FRC is adequately resourced.

Despite the plethora of calls for an unambiguous commitment to audit reform and the establishment of a clear timeframe for it be achieved, uncertainty now prevails about when, and if, ARGA will ever be created – either by this or any future government.