Defending Accountants and Accountancy Firms

Members and Member Firms of the following professional bodies can be investigated:

• Institute of Chartered Accountants in England and Wales (ICAEW);
• Chartered Institute of Management Accountants (CIMA);
• Chartered Institute of Public Finance and Accountancy (CIPFA);
• Institute of Chartered Accountants in Ireland (ICAI);
• Association of Chartered Certified Accountants (ACCA); and
• Institute of Chartered Accountants of Scotland (ICAS).

The FRC’s Conduct Committee can start an FRC investigation if there has been a referral from a professional body. They may also decide to pursue an investigation of their own accord. These cases are identified by the Case Assessment team.

The FRC’s Board or its Conduct Committee will decide, within two months of receiving the complaint, whether the criteria for commencing an FRC investigation are met, namely:

• whether the case raises or appears to raise important issues affecting the public interest in the UK; and
• there are reasonable grounds to suspect that there may have been misconduct.

When considering whether the matter raises public interest issues, the following factors are taken into account:

• the impact on a significant number of people in the UK;
• the loss or potential loss of significant sums of money; and
• whether the conduct undermines confidence in financial reporting or corporate governance.

Under the Accountancy Scheme, ‘misconduct’ is defined as any act or omission made in the course of a Member or Member Firm’s professional activities which falls “significantly short” of the standards reasonably to be expected of a Member or Member Firm, or has brought or is likely to bring discredit to the Member or Member Firm, or to the accountancy profession in general.

If the criteria are met, the Board or Conduct Committee will refer the case to the Executive Counsel and Enforcement Division to investigate. The Executive Counsel’s investigation will be conducted by an in-house team of lawyers and forensic accountants, usually culminating in an Investigation Report. The Executive Counsel may also instruct an external expert to provide an expert opinion and engage external Counsel to advise on the merits of the case.

During the course of the FRC investigation, you may be interviewed and asked to provide documentation. Prior to the interview, you should be provided with a copy of any documentation the FRC intends to rely on at the interview.

The interview will normally be recorded and a transcript prepared. You may be asked to provide further information, or attend further interviews.

At the conclusion of the investigation, the Executive Counsel will decide whether there is (a) a realistic prospect of an adverse finding by a Disciplinary Tribunal, and (b) whether a hearing is desirable in the public interest.

If the answer is ‘yes’, then a Proposed Formal Complaint will be served on you. This will set out the charges that the FRC intends to bring against you, including a summary of the evidence obtained in support of each charge. You will not normally be provided with the documents obtained during the investigation.

You will have eight weeks to make any representations based on the Proposed Formal Complaint. The representations are a crucial point at which you can put forward your response to the allegations.

Executive Counsel will review the representations and then decide whether or not to proceed with delivering the Proposed Formal Complaint to the Conduct Committee. If so, Executive Counsel will proceed to serving a Formal Complaint.

The Formal Complaint will set out the charges that will be considered by the Disciplinary Tribunal. This may differ from the Proposed Formal Complaint, as the Executive Counsel may have withdrawn or amended the charges based on your representations or any settlement negotiations (see below).

The matter will then proceed to a Disciplinary Tribunal hearing. However, you can continue to engage in settlement negotiations during this period. Prior to the hearing you will be able to serve any evidence you wish to rely upon at the hearing.

The FRC requires that all members, including former members, must at all times fully co-operate with the investigation. Member firms, including former and successor member firms, must use their best endeavours to ensure that every employee cooperates fully.

The FRC also has the power to require you to:

• provide information and any relevant explanations;
• permit them to inspect and take copies of documents/information; and
• provide copies of documents and information at your own expense (to a reasonable extent).

Failing to cooperate is not likely to be helpful to your position. Not only would this likely be a breach of your professional obligations, but it is possible that any decision-maker in your case might decide to draw an adverse inference from your silence. This means they can infer from your silence that you have no reasonable explanation for the alleged conduct, or no explanation that would stand up to proper scrutiny under investigation.

The Conduct Committee will decide whether the fact of an investigation and the outcome of the investigation should be published.

It will only decide to publish the fact of its decision to commence an investigation if it considers that such publication is necessary in all the circumstances, and any potential prejudice to the subject of an investigation is outweighed by the factors in favour of publication.

Yes, at any stage after the commencement of an investigation, but prior to any final determination of the Formal Complaint, it is possible for the Executive Counsel to commence settlement discussions in respect of part or the whole of any alleged misconduct. This is at the sole discretion of the Executive Counsel, having regard to the public interest.

The FRC offers discounts for settlement of a case, depending on the stage at which the matter is settled. For example, if a case is settled up to and including 28 days following deliver of the Proposed Formal Complaint, there may be a reduction of between 20% and 35% in relation to any fine imposed.  Early settlement may also help to limit any costs award, therefore there can be significant financial advantages in engaging in settlement negotiations.

There is a presumption in favour of publication of approved Settlement Agreements. There may also be an accompanying press announcement to summarise the Settlement Agreement and any sanctions and costs orders imposed.

Yes, the Executive Counsel can make an application for an interim order to the Conduct Committee at any stage between making a decision to investigate and the making of a decision by the Disciplinary Tribunal. The Conduct Committee will serve a notice of the application on the Member or Member Firm, and a Disciplinary Tribunal will be appointed to hear the application.

The Disciplinary Tribunal will either dismiss the Formal Complaint or make an adverse finding in respect of part or all of the alleged misconduct.

Where an adverse finding has been made against a Member or a Member Firm, a Disciplinary Tribunal may impose a sanction.

For Members and Member Firms the following sanctions may be imposed:

• reprimand;
• severe reprimand;
• conditions;
• fine of an unlimited amount specified by the Tribunal;
• waiver or repayment of client fees;
• order that a Member/Member Firm is not eligible for a practising certificate/registration/authorisation/licence for a specified period of time;
• order that a Member/Member Firm’s practising certificate/ registration/ authorisation/ licence be withdrawn or that it not be reinstated for a specified period of time; or
• exclusion as a Member for a recommended period of time (not applicable to Member Firms).

The Tribunal can also decide not to impose a sanction or may simply order the payment of costs, if it considers this to be appropriate in all the circumstances.

In addition to any financial penalty imposed, the FRC can seek a contribution to the costs of its investigation. Costs awards in FRC cases can be significant. Recent awards have been over £1 million where the matter has been determined by a Disciplinary Tribunal. It may therefore be in your interests to settle early before the costs escalate.

If the Tribunal dismisses the Formal Complaint, then it is open to you to ask for a costs award to be made in your favour. However, this is limited to legal costs reasonably incurred subsequent to the Formal Complaint being served. Such an order is rare. The Tribunal will also consider if the order is necessary given the FRC’s public interest responsibility to investigate complaints.

Yes, it is possible to appeal a decision of the Disciplinary Tribunal and, if permitted, have the Appeal Tribunal re-hear any of the witnesses and/or hear fresh evidence.

An appeal can only be made on the following grounds:

• the decision of the Disciplinary Tribunal was perverse or wrong in law; and/or
• there was injustice because of a serious procedural or other irregularity in the Disciplinary Tribunal proceedings; and/or
• significant and relevant new evidence has come to light which was not previously available and could not have become available on the making of reasonable inquiry; and/or
• the sanction was manifestly unreasonable.

The appeal must be made in writing and within 28 days of the date on which you are notified of the adverse finding.

Disciplinary Tribunals and Appeal Tribunals normally sit in public and will publish their decisions and reports unless this would not, in the opinion of the Conduct Committee, be in the public interest.

An FRC investigation will focus on matters relating to audits of:

1. Public Interest Entities (PIEs), namely listed entities, credit institutions and insurance undertakings;
2. AIM-listed companies with a market capitalisation in excess of €200m; and
3. Lloyds Syndicates.

Where there are concerns relating to audits of other entities, these will often result in an investigation by the relevant Recognised Supervisory Body (RSB), such as the ICAEW, ACCA, or ICAS. The FRC can, however, reclaim an investigation from an RSB if it is in the public interest to do so.

Individual statutory auditors and statutory audit firms.

Anyone can make a complaint or provide information to the FRC. This may include, for example, another regulator, a member of the public, or Parliament. The FRC can also identify issues for investigation from media reports.

The complaint will be sent to a FRC Case Examiner. They will decide whether the information raises a question as to whether there has been a breach of a ‘Relevant Requirement’ (see below). The Case Examiner has powers to make inquiries and obtain specialist advice in order to assist them in their decision.

If the Case Examiner considers that the information raises a question as to whether a Relevant Requirement has been breached, there are several options available to the Case Examiner. They can determine to:

1. take no further action;
2. arrange for Constructive Engagement with the statutory auditor or statutory audit firm (usually for low-level, minor and technical breaches of the Relevant Requirements);
3. refer the matter to Executive Counsel to consider making an application for an Interim Order; or
4. refer the matter to the Board.

If the matter is referred to the Board, the Board will determine whether:

1. to direct the Case Examiner to attempt to resolve the matter through Constructive Engagement;
2. there is good reason to investigate the matter; or
3. no further action is to be taken on the matter.

If the Board decides that there is good reason to investigate the matter, it will determine the scope of the investigation, then either refer the matter for investigation to the Executive Counsel or direct the investigation be delegated to the appropriate RSB.

A breach under the Audit Enforcement Procedure is referred to as a breach of the Relevant Requirements. This is essentially any breach of the relevant standards for the conduct of statutory audits.

The threshold is lower under the Audit Enforcement Procedure than the test for misconduct under the FRC’s Accountancy Scheme (which requires you to fall “significantly short” of the standards reasonably expected). It is intended to capture minor breaches as well as serious breaches that would have previously been classed as ‘misconduct’.

The Board will consider if there is a “good reason” to investigate. This includes, for example, where the conduct has the potential to damage public confidence in the audit profession, the potential to damage investor confidence in the truth and fairness of the financial reporting of an entity, or concerns a failure to adhere to ethical standards.

If the matter is referred for investigation, the Board shall send the Executive Counsel and the Respondent a Notice of Investigation. The Notice will be copied to the Respondent’s RSB.

The Executive Counsel’s investigation will be conducted by the Enforcement Division’s forensic accountants and lawyers. They have powers throughout the investigation to require information or documents from any statutory auditor or statutory audit Firm, to request any specialist advice, to request experts to carry out verifications or investigations, to require the auditor or firm to co-operate with the investigations (including attending for interview), or to request from any other person information that might be material to an investigation.

The investigation will culminate in preparation of an Investigation Report.

The FRC has powers under the AEP to require any statutory auditor or statutory audit firm to co-operate with an FRC investigation, including by attending an FRC interview. It can also serve a notice requiring you (or any statutory auditor/audit firm) to provide information which relates to work undertaken in respect of the statutory audit of the annual accounts or consolidated accounts of any audited person.

In cases involving PIEs, the Executive Counsel has the statutory power to enter premises at any reasonable time to carry out on-site inspections of audit work or audit firms. It also has the power to issue notices to specified third parties to provide documents. Those third parties could include the audit client itself.

If you fail to engage with the process and do not attend case management meetings or the hearing (should there be one), then the Chair or Tribunal can still continue in your absence if they are satisfied notice was properly given and it is fair in the circumstances. Failure to attend the hearing, or engage in the process at all, risks the decision maker drawing an adverse inference from your silence. It may be inferred that the failure to engage is because there is no reasonable explanation for the alleged conduct, or that an explanation would not stand up to proper scrutiny.

Settlement discussions can be entered at any time after the Notice of Investigation is issued but before the Tribunal has issued a Final Decision Notice.

Significant discounts to fines are potentially available for early admissions and settlement.

Following completion of the investigation, Executive Counsel will provide to the Respondent an Investigation Report. The Respondent will have 56 days from receipt of the report (or other such period as agreed by the Executive Counsel) to make written representations.

Executive Counsel may take into account a failure to make representations when determining whether a Respondent should be liable for Enforcement Action.

Yes, the Tribunal can make an Interim Order following an application by the Executive Counsel (either on behalf of the Case Examiner or on its own behalf) or on the Tribunal’s own volition. It can be made at any stage before issuing a Final Decision on Sanction and Costs.

An Interim Order can only be made if there is a hearing to determine whether the order should be made, or by agreement of the parties. Interim Order hearings will be held in private.

The Conduct Committee will decide whether to publish the fact of its decision to investigate. The Conduct Committee will consider whether such publication is necessary in all the circumstances, and any potential prejudice to the subject of an investigation is outweighed by the factors in favour of publication.

When determining whether publication is necessary in all the circumstances, the Conduct Committee must consider that an announcement will (among other things):

• help to maintain public confidence in statutory auditors and the regulation of them;
• protect users of financial statements;
• protect investors;
• help prevent malpractice that is potentially widespread;
• contribute to the effectiveness of the investigation; or
• help allay concern, contain speculation or rumour.

The FRC investigation will culminate in preparation of an Investigation Report.

The Respondent has the opportunity to make written representations on the Investigation Report.

After consideration of the representations, Executive Counsel will decide whether the Respondent has breached any Relevant Requirements, and if so, whether the Respondent should be liable for Enforcement Action.

If the Respondent is liable for Enforcement Action, Executive Counsel will issue a Proposed Decision Notice to the Respondent. The Proposed Decision Notice will include the breaches of the Relevant Requirement(s) with reasons, the proposed sanction(s), a proposed amount payable in respect of Executive Counsel’s costs, and an invitation to the Respondent to provide written agreement to all or part of the Proposed Decision Notice within 28 days.

If the Respondent agrees to the Proposed Decision Notice, an Independent Reviewer will be appointed to consider the Proposed Decision Notice. The Independent Reviewer will determine whether it is appropriate to issue it as a Final Decision Notice.

If the matter is not resolved by way of agreement to the Proposed Decision Notice (for example, if the Respondent fails to respond to the Proposed Decision Notice within the period specified in it), the matter may be referred to the Tribunal.

The Tribunal hearing is held in public, unless the Chair or Tribunal decides that holding it in public could prejudice the interests of justice, or that a private hearing may otherwise be in the public interest. If so, then all or parts of the hearing can be heard in private.

At the hearing, the Tribunal will consider preliminary legal arguments and the Respondent will then indicate if any admissions are made. The Executive Counsel will then open the case and present the FRC’s supporting evidence. The Respondent will have an opportunity to present their evidence before the Tribunal announces its decision. Witnesses may be called and may be examined by the party calling them, cross-examined and questioned by the Tribunal. A Tribunal is not bound by any previous Proposed Decision Notices (unless parties agree otherwise).

At the conclusion of the hearing the Tribunal will issue a Final Decision Notice which will set out its findings on liability. A separate hearing for sanctions and costs will then be arranged at the earliest opportunity.

You are not required to attend the hearing, but the Chair or Tribunal may continue in your absence if it is satisfied that notification of the Hearing was properly given and it is fair in all the circumstances to do so.  As above, failure to attend the hearing could result in the Chair or Tribunal drawing adverse inferences from your absence.

Executive Counsel and the Tribunal may impose the following sanctions:

• a notice requiring you to stop the conduct giving rise to the breach;
• publish a statement which may take the form of a reprimand or severe reprimand;
• order you to mitigate the effect or prevent the reoccurrence of the breach;
• temporarily prohibit you for up to three years from conducting statutory audits and/or signing audit reports;
• permanently prohibit you from conducting statutory audits and/or signing audit reports;
• declare that the statutory audit report does not satisfy the relevant requirements;
• order that you waive or repay client fees paid;
• temporarily prohibit you for up to three years from being a member of the management body of a firm that is eligible for appointment as a statutory auditor;
• temporarily prohibit you for up to three years from acting as a director of or being concerned in the management of a public interest entity;
• a financial penalty;
• exclusion as a member of a Recognised Supervisory Body.

A costs award may also be made requiring the statutory auditor or statutory audit firm to contribute to the costs incurred by the FRC.

Yes, you can appeal the Tribunal’s Final Decision Notice under certain grounds. You must lodge a Notice of Appeal within 28 days of the issuing of the Final Decision Notice. The Notice of Appeal must be in writing, identify the finding and/or appealed against, and state the ground of appeal.

Any appeal can only be made on the grounds specified in the AEP. Such grounds include that the decision was wrong in law, unfair because of a serious procedural irregularity, irrational, or was made without significant and relevant new evidence which could not have been adduced previously, or was manifestly unreasonable.

You can also appeal any decision to impose an Interim Order.

Yes, the FRC must publish the following mandatory announcements:

• the Final Decision Notice issued by Executive Counsel;
• the Final Settlement Decision Notice issued by Executive Counsel;
• the Final Decision Notice on Sanction and Costs issued by the Tribunal; and
• the Final Decision Notice issued by the Appeal Tribunal.

The FRC is required to publish mandatory announcements are published as soon as reasonably practicable immediately after the person or firm sanctioned has been informed of the decision.

The FRC must include the identity of the person or firm sanctioned except where:

• the person is an individual and publication of personal data would be disproportionate;
• publication would jeopardise the stability of financial markets;
• publication would jeopardise an ongoing criminal investigation; or
• publication would cause disproportionate damage to any institution or individual involved.

The FRC also has discretion as to whether to make announcements on actions that do not relate to sanction, for example, the commencement of investigations under the AEP or the outcome of such investigations where a sanction has not been imposed.

The FRC will usually include an acknowledgement if you have cooperated and provide details of any discount applied for early settlement.