The Financial Reporting Council (FRC) is now better equipped to take enforcement action over audit failures, according to chief executive Stephen Haddrill
The regulator has faced heavy criticism since its decision in September not to pursue a case against KPMG over its audit of HBOS. The Big Four firm gave the bank a clean bill of health just months before its collapse at the beginning of the financial crisis in 2008.
In particular, some had raised concerns over the possibility of ‘regulatory capture’, which refers to when regulators, created to act in the public interest, instead advance the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.
In a speech given at the FRC’s Developments in Audit event, Haddrill told delegates the test of misconduct, formerly established in the previous statutory framework, is ‘too high a bar for taking cases in relation to audit’.
‘The public expects that lesser inadequacies will be brought to book,’ he said, adding that for new cases, under the new audit regulation regime introduced in 2016, the test of misconduct has been replaced.
‘Now enforcement action can be taken on the basis that there has been a breach of the relevant requirements. This is a lower threshold test than proving misconduct. More potentially deficient audits will therefore be investigated, prosecuted and ultimately sanctioned to varying degrees,’ he said.
Haddrill also pointed to the steep increase in fines, which have risen from the hundreds of thousands to in excess of £5m over a two-year period. The FRC is awaiting the findings of a review of its sanctions, carried out by retired Court of Appeal judge Sir Christopher Clarke. Haddrill said the findings would be announced ‘later this year’.
He also identified the need to bring cases to tribunal ‘much faster’.
‘Our new powers help in this regard,’ he said. ‘Particularly in securing information from companies, and we will use them rigorously.’
To that end, Haddrill told delegates the FRC had overhauled its internal processes and built a new and ‘mostly legal’ team of 30.
‘And we will build this further as necessary,’ he said. ‘We have listened to the concerns of our critics, and are concluding a review of our own governance structures and processes.’
Report by Calum Fuller
