- The drumbeat of regulatory enforcement continued throughout the year, with a number of significant investigations commenced and concluded.
- We were heartened to see investigations being concluded without findings being made against the firm or partners. It is not every case in which sanctions are appropriate.
- Perhaps the most valuable aspect of the FRC's work is in relation to technical standards, and we are pleased to see the FRC addressing various key issues.
- Conversely, it was disheartening to see the lack of engagement with the considered responses provided by participants across the industry to the FRC's consultation on the operation of the Audit Enforcement Procedure. Two pleas from us. There should be greater transparency over Conduct Committee decision-making. And the use of financial penalties and the sanction of Severe Reprimand should be used sparingly against individual RI's, with greater use of Constructive Engagement as a means of driving up audit quality as an alternative to use of the "stick" with Investigation and Sanctions; there is evidence of audit losing talent due to the harshness of the regulatory regime.
Investigation regarding audit of Stirling Water Seafield Finance plc
The FRC announced on 13 January 2023 the opening of an investigation into the audit of Stirling Water Seafield Finance’s accounts for the year ended 31 December 2019. Whilst the FRC did not reveal the emphasis of its investigation, Companies House filings show that the audit firm had resigned as Stirling Water's auditors after it had breached the maximum 10-year engagement period.
Investigation regarding the audit of Zaim Credit Systems plc
The FRC announced on 18 January that it was commencing an investigation into the audit of the consolidated financial statements of Zaim Credit Systems plc for the year ended 31 December 2021. The trade of Zaim Credit's shares were suspended in September 2022.
Investigation regarding the audit of Intu Properties plc
The FRC announced on 16 February the opening of an investigation into the audit of the consolidated financial statements of Intu Properties plc for the years ended 31 December 2017 and 31 December 2018. Intu Properties went into administration in June 2020 after the company reported a £2 billion loss for FY19.
Closure of investigation regarding the audits of Serco Geografix Ltd, Serco Ltd and Serco Group plc
The FRC announced on 21 February that it had closed its investigations into the preparation and approval of the financial statements of certain Serco entities for the years ended 31 December 2011 and 31 December 2012. This news came after an audit firm was fined £6.5 million in July 2019 for misconduct during the audits of Serco Geografix for FY11 and FY12.
FRC publishes IFRS 9 Banking Audit Methodology Thematic Review
On 24 February, the FRC published a review of the Big 4's methodology with the IFRS 9 standards, specifically on the audit of Expected Credit Losses for banks. The review noted progress in the form of significant investment into the firm's respective IFRS 9 audit methodologies but stated that there were areas for improvement.
FRC sanctions audit firm and two former audit partners for the audits of Babcock International Group plc and Devonport Royal Dockyard Limited (a subsidiary of Babcock)
The FRC announced on 8 March that it had issued a Final Settlement Decision Notice against an audit firm and two former audit Partners. The financial sanction was a fine of £5.625 million after it was reduced for mitigating factors and admissions. The FRC noted that audit failings related to repeated failures to challenge management, obtain sufficient audit evidence and evidence of a failure to follow basic audit requirements.
FRC Releases New Guidance on Audit Firm Eligibility Criteria
On 17 March, the FRC issued new guidelines to aid auditors in applying eligibility criteria for the performance of audit engagements. For key audit partners, the new guidelines stressed that the auditors must have the appropriate competence and capabilities which includes having sufficient time to perform the audit to a quality standard. For engagement quality reviewers, the auditors must have experience of similar engagements and the appropriate authority to challenge the judgements made by the engagement team.
Closure of investigation regarding the audits of Sports Direct International plc
The FRC announced on 17 March that it had ceased its investigations into the preparation and approval of the financial statements of Sports Direct for the 52 week period ended 24 April 2016.
FRC updated its 'Our Approach to Audit Supervision' document
The updated document, which was published on 31 March 2023, outlines how the FRC supervises audit firms. The updates included the introduction of a Public Interest Entities Auditor Registration in December 2022 and Annual Supervisor Letters in late 2021.
Consultation on proposed amendments to Audit Enforcement Procedures
On 12 April, the FRC announced a review of the Audit Enforcement Procedures and invited all stakeholders to provide feedback on the proposed amendments. Stakeholders who provided feedback included all Big 4 accountancy firms, Grant Thornton, BDO and DAC Beachcroft.
FRC sanctions audit firm and audit partner for the audits of Luceco Plc
The FRC announced on 13 April the outcome of its investigation of the audit of the financial statements of Luceco for the financial year ended 31 December 2016. The financial sanction was reduced from £1.25 million to £875,000 on account of admissions and early disposals and the firm received a severe reprimand.
Investigation regarding the audit of Carr’s Group plc
The FRC's investigation regarding the audit of the consolidated financial statements of Carr’s Group plc for the period ended 28 August 2021 was announced on 18 April. Shares in the Carr's Group were suspended in January 2023 by the FCA due to a delay in the publishing of its FY22 audited financial statements.
Investigation regarding the audit of Made.com Group plc
On 20 April, the FRC announced that it had opened an investigating into the audit of the consolidated financial statements of Made.com Group plc for the year ended 31 December 2021. Made.com went into administration in November 2022 before it was acquired by Next for £3.4 million.
Investigation regarding an audit
The FRC also announced on 20 April that it had commenced an investigation into the audit of the financial statements of an unspecified company for the year ended 31 December 2021. The focus of the investigation concerns a possible breach of the fee cap requirements.
Sanctions against audit firm and audit engagement partner
The FRC announced the outcome of its investigation on 26 April into the statutory audit of the financial statements of TheWorks.co.uk plc for the financial year ended 26 April 2020. The sanction was a fine of £1,023,750 (reduced from £1.75 million to reflect the firm's co-operation and admissions) and a severe reprimand. The audit engagement partner was fined £43,875 (reduced from £75,000 to reflect co-operation and admissions) and a severe reprimand. The audit firm admitted breaches relating to a failure to respond to variances in stock counts found during the testing of controls, the adoption of a substantive testing approach and failure to perform adequate roll-forward and roll-back procedures.
Investigation regarding the audit of Joules Group plc
On 9 May, the FRC commenced an investigation into the audit of the consolidated financial statements of Joules Group plc for the year ended 30 May 2021. Joules went into administration in November 2022 and the administrators reported that the company owed over £100 million to creditors.
FRC publishes minimum standard for audit committees
The FRC announced the publication of Audit Committees and the External Audit: Minimum Standards on 22 May. These new guidelines were in response to the UK Government's plan to establish the Audit, Reporting and Governance Authority to replace the FRC. The objective of the new standards is to ensure a consistence approach across audit committees within the FTSE350 and to enhance the performance of those audits.
FRC Launches Consultation on Revision to the Corporate Governance Code
The FRC launched a public consultation on potential amendments to the UK Corporate Governance Code on 24 May. The proposed amendments will focus on directors' responsibilities for internal control, risk, audit and corporate reporting. The key topics that stakeholders were consulted on were i) new corporate reporting requirements; ii) audit committees; and iii) risk and internal controls.
Revisions to proposed International Standard on Auditing (UK) 505
On 31 May, the FRC published its proposed revisions to ISA 505 which concerned obtaining audit evidence from an independent source.
FRC publishes review of fair value measurement
The review, which was published on 13 June, concentrated on ensuring fair value measurement disclosures are transparent. The review emphasised that fair value measurement should use the assumption of market participants rather that a company's own assumption and that companies should employ third-party advice when it doesn't have internal expertise.
FRC publishes Audit Enforcement Procedure consultation response
The FRC published its response to feedback received from external stakeholders, including DAC Beachcroft, to its proposed reforms to the AEP on 16 June. The FRC noted that none of the proposed revisions received universal opposition and that it had decided to give effect to all of the amendments.
Sanctions against audit firm and audit partner
On 29 June, the FRC issued a Final Settlement Decision Notice in relation to the statutory audit of the financial statements of Eddie Stobart Logistics plc for the financial year ended 30 November 2018. The sanction was a fine of £1,990,625 (reduced from £3.5 million to reflect the firm's co-operation and admissions) and a severe reprimand. The breaches related to areas which were subject to prior year adjustments after Eddie Stobart disclosed significant prior year accounting adjustments in the 2018 financial year.
FRC issues amendments to FRS 102 and FRS 101
The changes reflect OECD’s Pillar Two model rules which are designed to ensure that large multinational groups pay a minimum amount of income tax. The amendments to FRS102 were announced on 11 July and created targeted disclosure requirements as well as temporary exception to the accounting for deferred taxes arising from the implementation of the new model. The amendments to FRS101, also announced on 11 July, provided an exemption from some of the disclosure requirements as long as equivalent disclosures are made in the financial statements.
Introduction of the draft Companies (Strategic Report and Directors’ Report) Regulations
The introduction of the draft Companies Regulation to the UK Parliament on 19 July set out the Government's plans to reform corporate reporting. If passed, very large companies must describe the actions taken by the directors to prevent or detect major fraud and explain how the company assures the quality and reliability of its corporate reporting. The draft regulation forms part of the wider audit reforms envisaged in the Draft Audit Reform Bill.
Richard Moriarty appointed CEO of FRC
On 31 July, the FRC announced that Richard Moriarty would become the FRC's CEO in October 2023 after Sir Jon Thompson announced his resignation. Richard Moriarty professed that he does not get 'good energy' from blockbuster fines, which signalled a potential change in the financial sanctions on firms found to be in breach of audit regulations.
FRC consults on revisions to Ethical Standard for auditors
The FRC launched a consultation on proposed revisions to the Ethical Standards on 8 August. A proposed revision, which recognises the importance the FRC places on auditor firm independence, was the enhanced prohibition of an audit firm auditing an entity in which there is an economic over reliance on fees from specific entities that are connected.
FRC sanctions audit firm
The FRC determined on 18 August that an audit firm failed to comply with the Regulatory Framework for Auditing in its audit of a Market Traded Company’s financial statements. The firm was fined £72,000 (reduced from £90,000 for co-operation and certain admissions) as a Regulatory Penalty. The most significant breach related to an incorrect classification of Convertible Loan Notes which resulted in a material misstatement.
UK and New Zealand audit authorities agree mutual recognition of audit qualifications
On 25 September, the FRC and NZ Financial Market Authority signed the Memorandum of Understanding on Reciprocal Arrangements. This agreement, which was the first of its kind, will provide a process for auditors who have obtained professional audit qualifications in either the UK or New Zealand to apply for recognition of their qualification and audit rights in the other nation. (We note the increasing importance of foreign-trained auditors to the profession, and the difficulties of retaining staff within audit.)
FRC issue FRED 84 draft amendments to FRS 102
The draft amendments, published on 28 September, introduced new disclosure requirement that would require companies to supply additional information regarding its use of supplier finance arrangements and any effect of those arrangements in the company's financial statements.
FRC Publishes Revised ISA (UK) 505 External Confirmations
The revised ISA 505 was published on 3 October and reformed the FRC's guidance to auditors on the use of external confirmation procedures to obtain audit evidence. The revisions include provisions to ensure the auditor maintains control over external confirmation requests and guidelines for responding to management's refusal to allow the auditor to send a confirmation request.
Sanctions against audit firm and two former partners
On 12 October, the FRC issued final settlement decision notices in respect of two separate investigations into i) the audit of the financial statements of Carillion for the financial years ended 31 December 2014, 2015, and 2016, and additional audit work in 2017; and ii) the audit of certain transactions relating to the financial statements of Carillion for the financial year ended 31 December 2013. The first investigation resulted in a financial sanction of £18.55 million (reduced to reflect co-operation and certain admissions) and concluded that the main audit failures related to contracts, debt and going concern. The second investigation led to a fine of £2,450,000 (reduced to reflect co-operation and certain admissions) and found that the audit firm did not sufficiently audit Carillion's contractual dealings with its outsourced IT and business services provider.
FRC to strengthen auditor reporting requirements of breaches of laws and regulations
The FRC launched a consultation on 18 October to reinforce the requirements from auditors to identify and report material misstatements that have occurred from non-compliance with regulations and laws. This consultation also aimed to clarify the guidelines on when auditors should report these breaches to the audited entity's regulators.
Letter from the Secretary of State for Business and Trade to the CEO of the FRC providing an update on the FRC’s remit
Kemi Badenoch published a letter on 22 October to Richard Moriarty, the new CEO of the FRC in which she outlined the government's priorities for the FRC’s work. Kemi Badenoch stressed that the Government thinks that all new reforms should be proportional and that rules and guidance that are no longer proportionate should be removed or streamlined.
FRC publishes review of companies’ IFRS 17 disclosures
The review, which was published on 15 November, concerned the degree to which companies complied with new rules requiring specific disclosure requirements for groups of insurance contracts in force on transition. The FRC stated that it was pleased overall with the quality of IFRS 17 disclosures.
UK and Switzerland audit authorities jointly approve mutual recognition of audit qualifications
On 12 December, the FRC announced that it has made arrangements with Switzerland's Federal Audit Oversight Authority for mutual recognition of statutory audit qualifications allowing auditors to work more easily in each country.
Closure of investigation regarding the audit of Intu Properties plc
The FRC announced on 19 December that its investigation into the audits of the consolidated financial statements of Intu Properties plc for the years ended 31 December 2017 and 31 December 2018 had closed.