We summarise below the key developments by the Financial Reporting Council (FRC), since early 2025, focusing on enforcement, concluded cases, regulatory trends and the changes in enforcement personnel and procedure.
Key themes:
- The levels of concluded enforcement activity has continued across 2025 and into 2026, with a steady flow of concluded investigations resulting in sanctions.
- Settlement remains the primary resolution mechanism, with most cases in the period concluding before the commencement of Tribunal proceedings, reinforcing the benefits of early engagement and cooperation.
- Non‑financial sanctions are used increasingly in the FRC's toolkit. Measures such as root cause analysis, audit reviews, enhanced training and ongoing reporting obligations are routinely imposed alongside financial penalties to address underlying audit deficiencies.
- Recurring audit quality issues persist, particularly in relation to professional scepticism and audit evidence.
- The use of AI is an increasing concern for the FRC, with guidance on its use in audits being published.
Enforcement activity and Sanctions
Financial sanctions remained significant during 2025/26, particularly in relation to large or complex audits. The FRC reported total financial sanctions of £14.5 million before settlement discounts for the year ending 31 March 2025. Settlement discounts continue to play a central role in enforcement outcomes, reflecting the FRC's emphasis on cooperation and early resolution.
Recent enforcement decisions concern a number of recurring themes as follows:
- Shortcomings in understanding the audited entity's business model and risk profile. Inadequate understanding of lending structures and related-party transactions has led to weaknesses in risk assessment, audit planning and the exercise of professional scepticism.
- Shortcomings in impairment testing and going concern assessments, highlighting the need for auditors to robustly challenge management assumptions and obtain sufficient appropriate audit evidence in areas requiring scrutiny and judgement.
- Significant failures in supervision, monitoring and internal control frameworks at firm level, highlighting the importance of effective oversight across audit engagements, to ensuring consistent audit quality and compliance with established standards.
Non-financial sanctions and Engagement
The FRC's use of non-financial sanctions continues to increase. Measures such as root cause analyses, audit quality reviews, enhanced training programmes, reporting obligations and remedial action plans are now routinely imposed alongside financial penalties. This reflects the FRC's growing focus on driving remediation and improving future audit quality, rather than solely penalising past failings.
The FRC also continues to make use of Constructive Engagement as part of its supervisory and enforcement framework. This process enables certain matters to be addressed without formal enforcement action, financial sanction or adverse publicity. Following the recent introduction of Published Constructive Engagement (see below), its use is likely to become increasingly prominent within the FRC's overall enforcement strategy.
Audit Enforcement Procedure and developments
The FRC has introduced potentially significant reforms to its Audit Enforcement Procedure (AEP), effective from 1 July 2026, as part of a wider package aimed at improving the speed, transparency and proportionality of enforcement outcomes.
The reforms introduce a broader range of “routes to resolution”, including Published Constructive Engagement, Accelerated Procedure and an Early Admissions Process, moving away from a binary model of full investigation or private constructive engagement.
Three new alternatives to a full Investigation or Constructive Engagement
The FRC recognise that opening a "full" investigation is, in some circumstances, a blunt tool and often requires extensive time, input and cost from audit firms and can be very disruptive.
1. Published Constructive Engagement ("PCE")
"Constructive Engagement" is the process already used by the FRC to discuss and correct less serious audit issues encountered by the FRC. However, the process and outcome is usually confidential. PCE would involve the details of the outcome being published, t meaning that other firms would potentially benefit from the issues publicly identified.
2. Early Admissions Process ("EAP")
Where the issues are sufficiently clear, and to avoid the time and cost of a full investigation, the firm may undertake its own investigation within an agreed timetable and provide a report setting out the relevant facts, together with admissions and a candid assessment of any shortcomings in its audit work. If those admissions are accepted, the matter can be resolved significantly more quickly.
The EAP is intended for cases where the firm has already identified and accepted shortcomings in the audit before the FRC opens an investigation and is willing to make admissions at an early stage.
3. The "Accelerated Procedure"
For suitable cases, rather than a full investigation, the FRC would present its findings to the firm based upon the facts it has accumulated to date, in order to seek to agree an early settlement of the FRC's adverse findings. An Accelerated Procedure matter is most likely to consist of the results of an FRC AQR report, a self-report of a breach submitted by an audit firm, or the findings of another regulator or public body.
4. "The Designated Officer"
The current process for commencing an investigation under the AEP involves internal recommendations to the FRC Conduct Committee, and although the process is opaque, the strong impression is that the Conduct Committee usually accept those recommendations.
The FRC are proposing to introduce a new role of "Designated Officer". It is understood that a nominated senior individual within the FRC will be responsible for making decisions on investigating audit firms.
Separately, there is also a greater emphasis on earlier publication of outcomes and learnings, alongside a more structured approach to sanctions, including an emphasis on increased use of non‑financial measures. As we noted above, the use of non-financial sanctions is already a growing trend.
Taken together, these changes are intended to give the FRC more flexible routes through the enforcement process. However, much will depend not only on the recently published guidance, but on how the FRC Enforcement teams interpret that guidance and operate in practice.
Audit quality inspection findings
The FRC’s Annual Review of Audit Quality 2025 indicates continued improvement in audit quality across the market, particularly among the largest firms.
The review nevertheless highlights a number of recurring areas requiring continued attention, including the exercise of professional scepticism, the evaluation of audit evidence and the consistent application of quality management processes.
Outside the largest firms, the FRC continues to emphasise the importance of strengthening systems of quality management and maintaining a sustained focus on audit quality improvements.
Overall, the inspection findings suggest that, while progress has been made, maintaining consistent audit quality across the market remains an ongoing regulatory priority.
Emerging issues - AI
The increasing use of technology, including artificial intelligence, continues to be an area of interest for the FRC. While formal guidance remains limited, the FRC has indicated that it is monitoring developments and considering the implications for audit quality and assurance.
The FRC published its first guidance on the use of artificial intelligence in audit in June 2025, setting out a structured approach to implementing AI‑enabled tools and clarifying regulatory expectations for their use.
The guidance emphasises the need for appropriate documentation, explainability and human oversight, confirming that auditors remain responsible for the work performed when using AI tools.
Subsequent guidance in March 2026 further highlights risks to audit quality arising from AI, including deficient outputs and misuse of results, and sets out principles to support the safe and effective adoption of AI in audit processes
Enforcement processes and timeliness
The FRC has reported improvements in the timeliness of enforcement activity, which has historically been a concern raised by many audit firms.
In the year to 31 March 2025, 90% of applicable investigations were completed or resolved within two years.
Looking ahead
Recent leadership changes, including the appointment of Richard Moriarty as Chief Executive and Penrose Foss as Executive Counsel, may signal a shift in tone towards a more conciliatory enforcement approach, alongside increased use of supervisory tools and a focus on accelerated settlement outcomes. The direction of travel generally suggests the FRC Enforcement Team will place a greater emphasis on flexibility in resolving cases.
