Roger’s blog makes a number of hard hitting points about the FRC. However, there are some promising actions which indicate change is happening at the FRC.
The meeting with the FRC and ShareSoc and UKSA members on 21 November was most helpful in establishing a good working relationship with the FRC. There are promising signs that the FRC want to work closely with us and we have been asked to put representatives onto a number of their committees and working groups. More info on this will follow shortly.
The FRC report on HBOS, that Roger refers to, outlines the following actions…
Lessons Learnt
1.4 Whilst much work was undertaken in the period between 2009 and 2013, we were not sufficiently proactive in making enquiries in relation to the HBOS audit and relied too heavily on the work of the FSA and the FCA/PRA and on the information provided by them. The FSA was the lead regulator in relation to the banks but it was not right to regard them as the lead regulator in relation to audit. We should have adopted a more proactive role and acted more quickly.
1.5 We now take the lead in responding to and investigating audit matters. This approach has been strengthened by the implementation of the EU Audit Regulation and Directive, which gave the FRC, as the designated competent authority for statutory audit in the UK, additional information seeking powers. We have also invested significantly in the resources of our Enforcement Division, to enhance its speed and effectiveness.
1.6 In view of the definition of Misconduct, the evidential threshold for taking action against auditors under the Accountancy Scheme was high and did not necessarily allow for holding auditors to account for poor quality audits. This was not entirely consistent with our mission to promote quality and with our wider work in relation to standards, guidance and audit quality review, all of which have the promotion of audit quality at their core. As the competent authority for statutory audit in the UK, we now have direct responsibility for determining, monitoring and enforcing auditing standards. In readiness for our designation as the competent authority, we developed our Audit Enforcement Procedure (the Procedure), which replaced the Accountancy Scheme for audit matters coming to our attention after June 2016. The new Procedure provides a single, streamlined procedure to deal with the full range of audit enforcement based on breach of a relevant requirement which includes auditing standards. Accordingly, the scope of the Procedure ranges from simple “misdemeanour” breaches to breaches which are so serious that they would previously have fallen into the “misconduct” category.
1.7 Public interest in and criticism of the outcome of our enquiries and investigation has highlighted a concern that we do not sufficiently explain the reasons for our decisions to close cases. In future, where there is a clear public interest to do so and subject to any applicable legal restraints, we will publish a summary of our reasons for closing an investigation.
1.8 Our structure, the Code of Conduct and the design of our enforcement procedures provide for independence of decision-making, free from conflicts of interest. We have, throughout our enquiries and investigation, required all potential decision-makers to declare whether they have relevant interests and to withdraw from the meeting for the relevant discussion and decision where their interests may conflict. Whilst we are satisfied that conflicts of interest have been managed appropriately in this case, the extensive interest and public comment on the outcome of our enquiries and investigation has highlighted the need for increased transparency to promote public confidence. In order to address these concerns, we have updated the Code of Conduct and published a Register of Interests.
1.9 There has also been wider commentary on our governance structure, which was established following public consultation in 2012. During 2017, in line with good practice, we started a review of our governance, including our governance structure. This review continues and includes consideration of any necessary changes to reflect developments in our public body status and to respond to changing public expectations.
1.10 This report focuses on the work undertaken in relation to our enquiries and investigations. However, our ongoing supervisory work, conducted through standard setting and audit inspection, is fundamental to promoting audit quality. The FRC responded to public expectation that auditors should consistently conduct high quality audits by increasing its audit quality review activities, and we now carry out and publish thematic reviews to raise standards in targeted areas such as the 2014 thematic review on banks and building societies. We have also set targets for stronger performance and expect these to be met. Audits that do not meet our expectations are subject to remedial plans, further supervision and are considered for enforcement action. In addition, we are increasing our focus on leadership in audit firms, firm culture and the effectiveness of the firms’ international networks. We also plan to review with others the scope of audit to assess whether it should be adapted better to meet public expectation.
Cliff Weight
Director
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