New auditor sanctions

On 21 December 2012, the Financial Reporting Council (FRC) published a Consultation Paper Auditor Regulatory Sanctions Procedure.  The FRC’s Audit Quality Review (AQR) is responsible for the monitoring of audit work for major audits (audits of listed companies and other major bodies).  Recognised Supervisory Bodies (RSBs) are also responsible for ensuring compliance with auditing standards and have an obligation to participate in such work in order that they can maintain their status as a RSB under the Companies Act 2006 (CA06).  In the UK, RSBs comprise:

• Chartered Accountants Ireland
• The Association of Authorised Public Accountants
• The Association of Chartered Certified Accountants
• The Institute of Chartered Accountants in England and Wales
• The Institute of Chartered Accountants of Scotland

There were some amendments made to CA06 which took effect on 2 July 2012 and the amendments included an additional requirement that RSBs should participate in arrangements which will enable the RSB undertaking the monitoring function to determine sanctions against the member where they have not complied with the RSB’s rules in relation to statutory audit work.

Before the amendments to CA06, when the AQR undertook audit monitoring and concluded that the audit work performed was of a poor standard, it was limited to only recommending action within the boundaries set out in the RSB’s regulations or bye-laws.  Such recommendations would then be considered by a committee of the particular RSB which is chaired by an audit partner, has no lay majority and includes partners who have significant responsibility at their firms for dealing with inspections undertaken by AQR.  The FRC recognised that – while no such requests were rejected – these sorts of arrangements were not viewed as being independent and as such were considered to be potentially damaging to both the integrity and objectivity of the AQR regime.

It is only poor quality audit work identified by AQR as part of its monitoring work that falls under the scope of the new Procedure and as such, action can only be taken against registered auditors.  For the purposes of this Procedure, ‘registered auditors’ include member firms which also include sole practitioners that are registered as auditors by the relevant RSB.  The term ‘poor quality audit work’ is defined in the Consultation Paper as:

‘when a Registered Auditor fails to comply with the Regulatory Framework for Auditing and

• Their continued registration or continued registration without restrictions or conditions could adversely affect a Major Audit Client or any other person; and/or
• It is necessary to impose a sanction to ensure that their Statutory Audit Functions are undertaken, supervised and managed effectively.’

If, for example, the AQR discovers an act of misconduct that has been committed by a member firm, such acts will be outside the scope of the Procedure and the acts will be referred to the relevant disciplinary procedure.

The Procedure

So how will this Procedure work?

There is a two-stage process involved.  First, the Monitoring Committee (a committee appointed by the FRCs Conduct Committee) will consider whether the AQR inspection reports warrant regulatory action.  Where the Monitoring Committee determines that such regulatory is appropriate, an offer of a proposed sanction will be made to the registered auditor and the auditor is requested to provide a response to the Monitoring Committee within 21 days of receiving the notice.  Where the registered auditor declines the proposed sanction, fails to respond or the Monitoring Committee does not accept the undertakings offered by the registered auditor, the Monitoring Committee will then refer the matter to an Independent Sanctions Tribunal whose decision will be final and will not be subject to appeal.  Meetings held by the Monitoring Committee are held in private and registered auditors cannot attend these meetings, but they may be attended by other persons acting in advisory roles which will be AQR staff.

The Independent Sanctions Tribunal (IST) may comprise of either three or five people, with the Chairman being a lawyer.  The IST must also include an accountant and there must be a majority of lay members that also includes the Chairman.  The IST cannot appoint members of the governing body, employees or officers of RSBs or members, directors or officers of the FRC.

While IST hearings will be held in private, in contrast to the meetings held by the Monitoring Committee, the registered auditor is permitted to attend the hearing, and to be represented and witnesses can also be called.  A minimum of 21 days’ notice of a hearing must also be provided.

Once hearings have been held, the IST may make a finding concerning some, or all, of the alleged failures of complying with the Regulatory Framework for Auditing.  On the flip side, the IST may dismiss the matter.  Such decisions are reached by majority votes and no abstentions are permitted and will take effect 14 days after written notification is sent to the registered auditor.  The IST is also required to report its decisions (together with reasons) to the Monitoring Committee who will then send a copy of this report to the registered auditor and to the RSB of which the registered auditor is a member.  In addition, the IST will also publish details of the sanction as soon as is practicable unless the IST deems it not to be in the public interest to do so.

Sanctions

Sanctions imposed on auditors can range from restrictions being placed on auditors and/or conditions, penalties and fines and, in more serious cases, withdrawal of audit registration.

Costs awarded are paid to the FRC and regulatory penalties are paid to the relevant RSB.

Written undertakings can also be requested from registered auditors as an alternative to imposing sanctions where the Monitoring Committee and the Independent Sanctions Tribunal consider this is a more appropriate course of action.

Consultation period

Responses to the Consultation Paper should be sent to consultations@frc.org.uk by Friday 1 March 2013 at the latest.  Responses are preferred by email, however, written responses can be sent to:

Sophie Broom, Communications Executive

FRC

5^th Floor Aldwych House

71-91 Aldwych

London WC2B 4HN

Comments will be made publicly available on the FRCs website unless you specifically request otherwise.

Category: Audit