Over the past year, the United Kingdom Financial Reporting Council (FRC) has been showing substantial vigor in its efforts to oversee auditors, accountants, and actuaries. In addition to the widely publicized £15 million fine against Deloitte and sanctioning of two former Deloitte partners in relation to Deloitte’s audit of Autonomy Corporation’s financial reporting, the FRC has been seeking a joint-record £15 million fine against another leading audit firm, KPMG, relating to KPMG’s role in the sale of mattress company Silentnight and recently declared, in its annual audit quality inspection results, that nearly one-third of audits that it inspected “still require improvement.”
The FRC’s Annual Enforcement Review 2021, published July 29, provides a detailed review of the FRC’s commitment to increased enforcement. The Review noted that the FRC had opened more investigations in the past year than the previous two years combined, had an increase in the number of open investigations/enforcement actions at year end, and a 44 percent growth in its Enforcement Division. In particular, it stated that the FRC had opened 95 cases in the preceding year (compared to 88 in 2019/20 and 46 in 2018/19), and closed 103 cases in the preceding year (compared to 83 in 2019/20 and 53 in 2018/19).
The Review also reported on a number of misconduct-related “themes” that it identified from concluded investigations of accountants over the past six years:
- Accountants’ fraudulent use of company funds;
- Misleading financial reporting (e.g., fabrication of revenue streams, wrongly recognizing revenue, premature recognition of revenue, inappropriate capitalization of costs, failure to account appropriately for bad debts, and inappropriate categorization of liabilities as operational rather than financial);
- “[I]ncorrect and sometimes reckless work” by management on goodwill; and
- Management misleading auditors, for example by withholding key information and even providing false documents.
Chief Compliance Officers in United Kingdom accounting, auditing, and actuarial firms should peruse the Review, and use specific examples of firm and individual misconduct cited in the Review in their internal briefings and training materials. While the future leadership of the FRC has yet to be determined, firms should expect that the FRC will remain vigorous in its enforcement work as it moves toward transformation into a still more robust and independent regulator, the Audit, Reporting and Governance Authority (ARGA).