Here are the key takeaways from the FRC's enforcement outcomes over the last year.  

Key Takeaways

• The number of matters which the FRC has considered in the last year seems to have decreased significantly. Fewer enforcement investigations are being opened and fewer cases are being considered by the Case Examiner and Case Assessment team.
• Despite the reduction in new cases, the Enforcement team has expanded further and has hired two new lawyers and one new forensic accountant, which indicates a trend towards more enforcement investigations.
• There has been an increase in the referral of cases to constructive engagement. This may show a positive approach which allows firms to take prompt remedial action and avoid investigation.
• The new government has confirmed that it will reform audit regulation, transitioning the FRC to a new regulator, ARGA. This could lead to an increase in investigations and enforcement activity as the companies and directors within ARGA's remit expand.
• In relation to concluded investigations, failure to obtain sufficient and appropriate audit evidence, insufficient audit documentation and a lack of professional scepticism continued to feature prominently.
• Several concluded cases also involved failures adequately to understand the entity, resulting in failures in relation to the identification and assessment of the risks of material misstatement and, consequently, in the design and implementation of audit procedures to address those risks.

Please click this link to see a breakdown of the key statistics and analysis of trends from the Review.

Themes from Concluded Cases

The FRC has identified the following five themes from enforcement action in the last year.

1. Ongoing failures to obtain sufficient appropriate audit evidence and documentation.
2. Understanding the entity.
3. Professional scepticism: being alert to conditions which may indicate possible misstatement due to error or fraud.
4. Accounting for long-term contracts.
5. Failure to properly consider management's assessment of an entity continuing as a going concern.

Enforcement Trends

1  Individual accountability

In the last year, the action taken by the FRC against individuals has gone beyond fines and included lengthy exclusions from membership of the ICAEW against two individuals.

2 Use of non-financial sanctions

The FRC views itself as an "improvement regulator", particularly for improving audit quality. One method the FRC employs when acting in this capacity is the use of non-financial sanctions, which it tailors to identified failures and develops in collaboration with a firm's supervisor.

The FRC continues to impose non-financial sanctions in more cases than it does fines. The value of financial sanctions has increased while the total number of sanctions imposed has dropped year-on-year, with a corresponding increase in the average fine.

3 Cooperation

As well as the use of non-financial sanctions, the FRC has shown a willingness to impose fines on firms and individuals to reflect insufficient cooperation throughout an investigation.

4 Financial services overlap

A number of cases have related to collapses and frauds in the financial services sector. As a highly regulated sector it may sometimes be seen as lower risk from an audit point of view, but events have suggested otherwise.

Connected to this trend, the FCA has recently issued its first fines against auditors for (1) poor CASS report quality and (2) failure to notify it of significant regulatory breaches by the firm under audit in accordance with s243(6) FSMA, and so there is an element of double jeopardy for audit firms where they may face investigation on several fronts.