This article was first published by Accountancy Daily on June 6, 2023.
Chartered accountants are accustomed to continuous oversight of their work by regulators. While regulatory supervision can often be a collaborative process, it does sometimes culminate in individual accountants and firms facing investigation or enforcement action, which can be lengthy (taking years), highly stressful, particularly felt by individuals, with significant reputational consequences.
Of late, accountancy regulators have shown an increased willingness to use close supervisory and enforcement tools. In response, accountants and firms facing enforcement action should ensure that their interests are protected during the life of any investigation or disciplinary process.
Financial Reporting Council (FRC)
Widely regarded as the most significant accountancy regulator, the Financial Reporting Council (FRC) undertakes investigations of audit and accountancy firms where there is a public interest factor, usually involving the audits of PLCs and large corporates. Consequently, the FRC’s enforcement investigation work is mainly focused on the largest accountancy firms.
The FRC has a seemingly ever-growing enforcement division of lawyers and forensic accountants. Those who find themselves subject to an FRC investigation must be prepared for a rigorous and lengthy investigation with significant document requests followed by intensive interviews and a follow-on process that does not lend itself to the early settlement often seen with other financial regulators, such as the Financial Conduct Authority (FCA).
Indeed, the FRC will only really discuss the case in any detail and the terms of settlement when it has undertaken all the heavy lifting of the investigation and drafted a lengthy written complaint with supporting documents, in many cases including expert, evidence.
By this point, the FRC seems committed to a stated regulatory outcome; it can take a lot of ‘advocacy’ to move the FRC back from this position.
The FRC, along with firms and especially individuals under investigation, would certainly benefit from more flexibility in the enforcement process. The long-overdue replacement of the FRC by the Audit, Reporting and Governance Authority (ARGA), slated for the 2023/24 financial year, represents a timely opportunity to overhaul these enforcement procedures in order to improve disclosure between the regulator and firms.
The FRC’s most recent Enforcement Review noted that it opened 69 new cases in 2021/22, a significant decrease from 95 new cases the previous year. According to the FRC, this reduction is due to its opening fewer cases on issues relating to audits where these issues have already been resolved with firms using ‘constructive engagement’.
Constructive engagement – a process introduced by the FRC’s Audit Enforcement Procedure – allows certain less serious cases to be resolved without full investigation and enforcement action, for example a minor breach that does not cause real concern about harm to investors. The FRC resolved 24 cases through constructive engagement last year.
There are clear advantages to firms resolving cases by constructive engagement rather than a full investigation: the FRC does not publish individual outcomes of constructive engagement, and pursuing this process can allow firms to develop a productive, ongoing relationship with their regulator that allows concerns to be addressed at an early stage with relatively low impact for the firms, for example by offering additional staff training.
Despite these advantages, firms should still proceed with caution when going down the constructive engagement route, as it does not provide a guaranteed or necessarily speedy resolution. Indeed, it takes seven months on average to resolve a constructive engagement case and the FRC can refer these cases to its Conduct Committee for a decision on opening an investigation if it is not satisfied with the outcome.
Information shared by firms with the FRC in the spirit of constructive co-operation can, therefore, ultimately be used in an enforcement investigation, so firms, and their advisers, may be guarded before fully embracing constructive engagement.
Institute of Chartered Accountants in England and Wales (ICAEW)
Similarly ICAEW’s Regulatory and Conduct Annual Report 2022-2023 suggested that ICAEW is channelling only the most serious and complicated cases to its Disciplinary Committee (DC) and seeking to resolve less serious cases by alternate methods.
In particular, ICAEW’s investigation committee offers consent orders to some members subject to complaints, to avoid the case being escalated to the disciplinary committee. Consent orders can impose, for example, a fine or a reprimand on the member or firm.
In 2022, the investigation committee offered consent orders in 115 cases, and only 41 cases went to a disciplinary committee, a small reduction from 44 tribunals in 2021, although since late 2022, some practitioners have reported an uptick in cases being referred to the disciplinary committee that normally would have been resolved via the investigation committee.
Additionally, ICAEW issued 25 fixed penalty notices in 2022. This process allows certain types of lower level, compliance-type complaints to be dealt with by way of fixed penalty without review from the investigation committee, with subjects of complaints receiving a 30% discount on the normal financial penalty.
In 2022, ICAEW also approved five settlement agreements with the subjects of complaints, thereby avoiding the need for disciplinary tribunals. This pragmatic approach should be encouraged to achieve timely and cost-effective regulatory outcomes.
Association of Chartered Certified Accountants (ACCA)
As a fellow senior accountancy regulator, the ACCA’s Report on Regulation 2022 refers to its priority of delivering ‘effective and efficient disciplinary and regulatory processes’. It aims to conclude its investigation of 75% of cases within six months.
In 2021 (the year covered by the 2022 report), the ACCA received 1,063 complaints about its members – almost double the number it received the previous year. Still, the ACCA heard only 84 disciplinary committee hearings in 2021, a decrease from 115 the year before. However, the ACCA is closing far more cases after conducting an initial review or investigation, which – rightly – reserves the disciplinary committee’s time for the most complex cases.
Regulation of accountants’ anti-money laundering (AML) controls
With anti-financial crime remaining high on the agenda of financial and professional services regulators as well as UK law enforcement agencies, we can expect to see a renewed focus on anti-money laundering (AML) controls, following a recent report from the Office for Professional Body Anti-Money Laundering Supervision (OPBAS).
OPBAS supervises professional body supervisors (PBSs) for AML controls – nine in the legal sector and 13 in accountancy, including ICAEW and ACCA.
This report observed that many of the professional body supervisors reviewed did not effectively assess and prioritise risks within their AML supervisory and enforcement work and that many of the risk assessments lacked evidential bases.
Although addressed towards the professional body supervisors themselves, these observations are likely to have a knock-on effect on the scrutiny of the AML risk assessments conducted by accountancy firms.
Additionally, OPBAS commented that professional body supervisors were not dealing with cases in a timely manner, which may encourage accountancy regulators to act more swiftly and assertively in their enforcement action.
Hopefully, OPBAS’ comment around timeliness will not, however, prompt professional body supervisors to rush enforcement action: AML is a complicated area for firms, particularly considering new sanctions regimes, and hurried decisions can result in unfair results.
Despite the peaks and troughs of more formal and hence public regulatory actions, compared to informal resolutions and guidance to firms by the accountancy regulators, the fact remains that any form of regulatory engagement is a significant event for firms, and even more so for individuals, who personally feel the burden and pressures of an investigation.
It is high time that the leading accountancy regulators reviewed their approach to managing investigations in order to encourage more timely and proportionate resolution.