Constructive engagement provides a basis for taking swift and targeted remedial action in less serious cases so that the causes of failures are addressed and the risks of repetition minimised. During the last year, the Case Examination team opened 88 cases, a 90 per cent increase on the previous year, and successfully resolved 31 cases through constructive engagement.
Where formal enforcement action has proved necessary, a wide range of significant non-financial sanctions have resulted including: the creation of an Ethics Board at a Big Six firm, mandated improvements to policies and procedures, the requirement for firm-wide training, the monitoring of regional offices, two undertakings to suspend accountancy membership and a lifetime prohibition on signing audit reports.
The report makes clear that such measures do not replace financial sanctions which remain an important tool for driving improved behavior: financial sanctions imposed during the year totalled £16.5m before settlement discount.
The report reveals that timeliness remains a key priority for the Division and that increased resourcing in the Division, which grew by 14% over the course of the year, is beginning to have a real impact with material improvements recorded against the FRC’s published two-year KPI.
The review also offers a detailed analysis of concluded cases over the last six years to identify recurring themes. The overwhelming majority of cases have involved a failure to exercise professional scepticism and a failure to obtain sufficient audit evidence, matters that go to the heart of strong audit.
Elizabeth Barrett, FRC Executive Counsel and Executive Director of Enforcement said, “Given the detrimental impact audit failure can have on investor and wider stakeholder confidence it is critical that when audit standards are not met or ethical failures occur, they are identified and rectified. This year’s AER shows an increased use of constructive engagement, to provide a timely and proportionate way of addressing deficiencies and the wider deployment of non-financial sanctions to drive audit quality. The overall results for the year also reflect the impact of a larger and more effective enforcement division.”