The independent review, chaired by former Court of Appeal Judge Sir Christopher Clarke, makes a number of recommendations to update the regulator’s approach to enforcement in light of stakeholder concerns that sanctions were too low and the FRC’s role as competent authority.

The review team said it had decided against recommending a formal tariff for financial sanctions, partly because the range of failings in relation to both audit and non-audit related breaches is very broad. This means tribunals have to consider a wide range of wrongdoing and of facts, factors, and circumstances which, or the combination of which, may differ widely from case to case.

The report states: ‘We do not think it possible to create a useful tariff or guideline system, which does not either unduly fetter the discretion of tribunals or which, itself, provides a flexibility which then brings back into play the application of the principles specified in the existing guidance.’

However, the review found that the irreducible minimum for any financial penalty will, in many cases, be an order for the waiver or repayment of the relevant fees, unless for any reason that is impractical or inappropriate eg, where the client has ceased to exist, or has acted in a dishonest manner, or been complicit in the wrongdoing or otherwise culpable. Account may also have to be taken of any value received by the client from the services.

The report states: ‘As to that it seems to us that, if one of the Big Four firms was guilty of seriously bad incompetence, in respect of the audit of a major public company, where the errors were measured in nine figures or more and there had in consequence been either widespread actual loss or the risk thereof, a financial penalty of £10m or more (before any discount) could be appropriate.’

The review says such a fine would be commensurate with the seriousness of the wrongdoing, act as a meaningful deterrent, and be sufficient to meet the primary objectives of sanctions. It also assumes that the failings did not involve dishonesty or conscious wrongdoing. If they did, the figure could be well above that.

In relation to misconduct in respect of non-audit matters it would be necessary to take account of the revenue which the firm had earned from it, which may, itself, produce very sizeable figures.

The review also recommends tightening up the description of the sanctions regime to stress the importance of the quality and reliability of the audit work conducted by the audit firm itself. The panel says it would be more appropriate to change the wording in paragraph 9 of the sanctions guidance, as follows:

• to uphold proper standards of conduct amongst members and member firms and to maintain and enhance the quality and reliability of accountancy work; and
• to maintain and promote public and market confidence in the accountancy profession and the quality of corporate reporting and in the regulation of the accountancy profession'.

In the case of individuals, suspension or expulsion will be appropriate if there has been dishonesty, intentional wrongdoing or recklessness. The review recommended the guidance should make particular provision in relation to findings of dishonesty, as this is so inimical to everything that a profession stands for, and so destructive of public confidence.

It recommended a provision that where an individual has been found to have been dishonest they should normally be that he be excluded from membership for at least 10 years.

The review also argued in favour of paying greater attention in the future to the use of non-financial sanctions than has been the case in the past. It points out that a financial penalty had become the expected outcome of the disciplinary process, when that did not have to be so, and says sanctions in relation to statutory audit work should be designed and applied for the purposes of improving its quality.

The panel did not deal directly with the disparity between fines issued to the Big Four and other mid-tier firms. It stated that ‘a big firm which had been guilty of a relatively minor breach of Relevant Requirements in relation to a single audit could find itself paying a fine many times greater than that imposed on a firm with lesser revenue which had been guilty of a much more egregious breach in relation to several.

‘Starting points or ranges, which use a percentage of revenue, gross or net, may, thus, themselves, produce sanctions which are disproportionate to the breach, a disproportion which may work in either direction. At the same time fines must be ones which have an impact on those on whom they are imposed.’

In relation to Misconduct in respect of non-audit matters it would be necessary to take account of the revenue which the firm had earned from it, which may, itself, produce very sizeable figures. The review cites the calculation in the MG Rover case, where, but for the partially successful appeal on liability, Deloitte would have faced a sanction of £14m based on net revenue earned plus interest plus deterrence.

The panel strongly argues that the MG Rover fine was commensurate with the level of misconduct, stating: ‘Any assessment such as that risks characterisation by those who object to it as a figure plucked from the air masquerading as an exercise in judgement. It is nothing of the kind.

‘It is our best estimate of the sort of figure that is likely to be appropriate for a case of that kind, based on our own experience in our respective fields.

‘We recognise that everything will depend on the facts and that assessing a figure in the air is of limited assistance. We do so because of the range of suggestions as to what might be the top end of any penalty.’

The panel cited the example of a Public Company Accounting Oversight Board (PCAOB) sancction against Deloitte Brazil, which it viewed as good yardstick for dealing with audit sanctions.

In this case, the sanction was levied against the company for filing false audit reports for a Brazilian airline where, in addition to a $8m (£6m) civil penalty, the firm agreed to a number of sanctions including a censure, undertakings to improve the firm’s system of quality control, the appointment of an independent monitor to review and assess the firm’s progress in achieving its remedial benchmarks, immediate practice limitations, including a prohibition on accepting certain new audit work until the monitor confirmed the firm’s progress, and additional professional education and training for the firm’s audit staff.

The report stated: ‘We regard this as a good example, in a very serious case, of the combination of financial and non-financial sanctions.’

In addition, the 72-page review recommended that any requirement for tribunals to consider themselves bound by previous cases when determining the appropriate sanction to impose should be struck out, and settlement discount provisions should be designed to encourage timely settlement. It also called for the FRC to make available in one readily accessible place on its website information in respect of disciplinary outcomes.

In statement the regulator said: ‘The FRC welcomes the report and is grateful to the review panel for its work.  The FRC will now carefully consider the report in order to decide which recommendations to adopt and incorporate into revised sanctions guidance to ensure that sanctions imposed continue to be fair, effective and in the public interest.’

In the interests of transparency, the review calls on FRC to publish the decisions of tribunals and other decision makers, including settlement agreements, together with a summary of the cases including details of the respondent(s), the sanctions imposed and a summary of the Misconduct/breach of Relevant Requirements established indicating what went wrong.

The list of respondents to the initial call for comment on the FRC sanctions review has been published in a separate 195-page document. The independent review panel received input from 29 organisations, including all Big Four firms, and Grant Thornton at mid-tier level, as well as some of the professional accounting institutes including ICAEW and ACCA, and a number of key stakeholders, including the Investment Management Association and The Pension Regulator, and a group of legal experts, the Legal Chairs group.

Independent review of the Financial Reporting Council’s Enforcement Procedures Sanctions

Report by Pat Sweet, additional reporting by Sara White