2 August 2023 Annabel Sim Contract and Commercial - Corporate Governance - Dispute Resolution - Risk and Compliance

Key highlights from the FRC’s latest Annual Enforcement Review

The FRC has published its Annual Enforcement Review for 2023. The review paints a complex picture, with record fines contrasting against a reduction in the number of cases opened and an overall drop in the FRC’s case load. Are we beginning to see the FRC’s focus on audit quality paying off or is the regulator keeping its powder dry as the economic climate worsens and it prepares for its expanded set of powers when it transitions to ARGA?

We will shortly be publishing our own annual enforcement review in which we will set out some of the key audit and accountancy enforcement themes emerging from the last year and our views as to the trends and areas of enforcement focus for the year to come. In the meantime, we share a few spoilers and our key first impressions of the review below.  

  • Co-operation: the FRC has provided further information on what is required by way of co-operation with its enforcement investigations. The FRC has been increasingly focused on co-operation and recent cases have demonstrated the delicate balancing act of rewarding acts of exceptional cooperation versus sanctioning instances of poor cooperation. Also particularly notable from the latest guidance is the interplay between making admissions and co-operation.
  • Key Statistics: 
    • There is no change to the continuing trend of the majority of enforcement actions being resolved by settlement.
    • The FRC has imposed financial sanctions totaling £40.5m (pre-discount), including the highest ever sanction of £20m (pre-discount). 
    • Although the FRC is falling 25% short of meeting its own KPI of resolving cases within two years, the regulator nonetheless concluded the highest number of investigations in the last year, resolving a record 19 cases. 
  • Key Themes: Recurrent themes from enforcement actions of the previous year include failure to apply sufficient professional scepticism, failure to obtain sufficient audit evidence, and insufficient audit documentation. Themes increasingly coming under the FRC’s spotlight include the audit of inventory (especially in the retail, distribution and manufacturing sectors), as well as going concern and assessment of risk in light of the increasingly turbulent economic climate.