Financial Reporting Council (FRC) Investigations

When Does the FRC Investigate?

The FRC initiates an investigation upon reasonable suspicion of misconduct by a registered member or firm. This misconduct can encompass various areas, including:

• Breaches of professional standards: Deviations from established accounting, auditing, or actuarial principles could trigger an investigation.
• Financial Misconduct: Intentional manipulation of financial statements or reports to mislead stakeholders.
• Failing to meet expected standards: Not exercising due care and skill expected of a professional can raise concerns.
• Bringing the profession into disrepute: Any conduct deemed damaging to the reputation of accountants, auditors, or actuaries could be investigated.

Examples of FRC Investigations

Recent high-profile cases illustrate the scope of FRC investigations. The collapse of Carillion, a major construction company, led to a probe into the audit practices of KPMG, one of the “Big Four” accounting firms. The FRC ultimately imposed a record fine for KPMG’s failings in Carillion’s audits.

The FRC Investigation Process

The FRC’s Enforcement Division spearheads investigations. The process typically involves the following steps:

1. Initial Inquiry: Upon receiving an allegation or identifying potential misconduct, the FRC conducts a preliminary assessment to determine if an investigation is warranted.
2. Formal Investigation: If an investigation proceeds, the FRC gathers evidence, interviews relevant parties, and reviews documents. The subject of the investigation has the right to legal representation and can respond to the allegations.
3. Settlement or Enforcement Action: The FRC may seek a negotiated settlement with the investigated party. If no agreement is reached, the FRC can pursue formal enforcement action.

Potential Outcomes of an FRC Investigation

The outcome of an FRC investigation can vary depending on the severity of the misconduct. Possible consequences include:

• No further action: If the FRC finds no evidence of wrongdoing, the investigation is closed.
• Reprimand: A formal censure issued by the FRC.
• Financial Penalty: Fines levied against individuals or firms. The FRC has imposed significant financial penalties in past cases.
• Restriction or Prohibition: The FRC may restrict or prohibit an individual from practicing or holding specific positions within the profession.

Importance of FRC Investigations for Businesses

FRC investigations serve businesses by:

• Ensuring Accurate Financial Reporting: Strong enforcement discourages accounting misconduct, leading to more reliable financial information used for decision-making.
• Protecting Investor Confidence: A robust regulatory framework fosters trust in the financial system, attracting investment.
• Promoting Ethical Practices: The FRC sets the tone for ethical behaviour within the accounting and actuarial professions.

How to Prepare for an FRC Investigation

For accountants, auditors, and actuaries, maintaining meticulous documentation, adhering to professional standards, and promptly addressing concerns are crucial for minimising the risk of an FRC investigation.

If facing an investigation, seeking legal counsel experienced in FRC proceedings is vital. Jeremy Gordon has substantial experience of successfully guiding subjects of FRC enforcement investigations through what is a long and stressful process.