The Financial Reporting Council (FRC) is an independent regulatory body in the U.K. and Republic of Ireland (ROI) responsible for regulating auditors, accountants and actuaries. The FRC and its subsidiaries also play important roles in the oversight and development of corporate governance standards in the U.K. and ROI, such as the U.K. Corporate Governance and Stewardship Codes and the general standards for the accounting industry.

Founded in 1990, the FRC historically has tended to attract less attention than some of the better known and better funded U.K. enforcement bodies including the Financial Conduct Authority (FCA) which regulates the U.K. financial services authority and Serious Fraud Office (SFO) which investigates and prosecutes serious or complex fraud and corruption in England, Wales and Northern Ireland.  But any complacency or ignorance of the significance or broad range of powers and sanctions at the FRC’s disposal may come at a significant cost – the FRC’s enforcement activities are on the increase and the entity is becoming a major player in the U.K. regulatory environment.

The provisions governing FRC enforcement were originally set out in an Accountancy Scheme and Actuarial Scheme (the Schemes) – contractual arrangements between the FRC and the various accountancy and actuarial professional bodies.  Following the implementation of EU legislation in June 2016, however, a new Audit Enforcement Procedure (AEP) is used for all new audit matters.  The Accountancy Scheme continues to be used for non-audit matters and audit investigations that commenced before June 2016 while the Actuarial Scheme continues to be used for all actuarial investigations.

The FRC is supported by three governance committees (an Audit Committee, a Nominations Committee and a Remuneration Committee), two business committees (a Codes & Standards Committee which advises on issues of corporate governance and a Conduct Committee which, amongst other things, oversees professional discipline, audit quality reviews and the regulation of accountants and actuaries), and three advisory councils.  The Conduct Committee is supported by three further Committees, whose functions include monitoring and providing oversight in respect of enforcement investigations and tribunal proceedings.

The FRC’s Enforcement Division, currently led by Elizabeth Barrett, is responsible for conducting investigations and bringing enforcement action against auditors, accountants, actuaries and accountancy firms.  In July 2019 the division published its first annual review which provided an overview of the extent and progression of investigations.  During the year 2018-2019 the FRC resolved 16 cases through constructive engagement (a process introduced by the AEP to resolve cases where audit concerns can be addressed without full enforcement action, e.g. where a breach has been minor or where no real concern exists about harm to investor, market or public confidence in the statutory audit process), a figure that rose to 31 the following year to reflect a focus on the FRC further developing the constructive engagement process as an effective and efficient alternative to referral to the Conduct Committee for investigation.

The FRC is by no means shy, however, about proceeding to full investigations by its Conduct Committee where appropriate.  In 2018-2019 a total of 15 investigations were opened and a similar number (14) were opened the following year.  During 2018-2019, 13 cases were concluded – a significant increase on the figure in previous years – and twelve of these resulted in findings of misconduct and sanctions.  The same number of cases were again closed in 2019-2020, continuing a net build in the number of open cases and leaving the body with 42 open cases as at 31 March 2020.

The FRC has also become increasingly aggressive with its imposition of sanctions.  Should the FRC find misconduct or a breach of relevant regulations then it has a sweeping range of sanctions that it can turn to.  The Schemes and the AEP allow, amongst other things, the imposition of unlimited fines, the issuance of a reprimand or severe reprimand, the placing of restrictions on the nature of work undertaken and clients represented, and the mandating of specific education and training programs.  The AEP contains a number of specific additional sanctions, including. a declaration that a statutory audit report does not satisfy relevant requirements and imposition of a prohibition on being a member of the management body of an audit firm or a director of a public interest entity.

The 2018-2019 financial year saw a total of £42.9m levied (pre-discount) over 27 financial sanctions, nearly treble the total of £15.5m levied in the preceding year over 11 financial sanctions.  The 2019-2020 financial year saw both sets of numbers return to previous levels although the tail end of the FRC’s financial year had a little overlap with the onset of the coronavirus pandemic.

Evidence of the increasingly large role to be played by the body in years to come can also be found in other areas.  The FRC’s budget is increasing by 9% to £45.4 million and the number of people employed is anticipated to grow from 245 in March 2020 to 358 in March 2021; a significant 46% increase that correlates with the body’s aims of increasing the number of audit quality reviews and corporate reporting reviews that it conducts each year in addition, of course, to its continued enforcement work.

In the months following the period discussed in the most recent annual review, the FRC continued to attract attention with a ramp up of investigations and push for significant fines.  In May 2020 the body announced the launch of two investigations into KPMG and PwC audits of Eddie Stobart Logistics plc, the well-known logistics and haulage company.  In July 2020, the Disciplinary Tribunal heard the case brought against Deloitte UK for serious failures in its audits of Autonomy, a former FTSE 100 technology company that was later acquired by Hewlett-Packard before scandal and a fraud investigation led to a nearly $9 billion writedown of the company’s value.  The tribunal ruled in favour of the FRC, finding Deloitte guilty of serious audit failings and leaving the UK’s second largest accounting firm now facing what could be a record £15 million fine.

The FRC remains a regulatory body that the general public may be unaccustomed to seeing in the news.  Its headcount and budget pales in comparison to that of the FCA; it has not entered into the ‘blockbuster’-type settlements that have recently proven a fillip to the SFO. Yet all this belies a reality that auditors, accountants and actuaries should be alive to – without much fanfare, the FRC is quietly and efficiently playing an ever-increasing role in the UK regulatory landscape.