FRC: auditor regulatory sanctions procedure

General comments

We have, in the past, supported the move towards appropriate regulatory independence of the FRC, which we perceive as vital to underpin confidence in the accountancy profession. As stated in January 2012, ‘we agree with the proposal that, under certain circumstances, the FRC should be able to require an RSB to impose proportionate sanctions, provided clear procedures are published by the FRC’.

Nevertheless, it is essential to respect the right to a fair hearing prior to sanctions being determined. In addition, ACCA has previously expressed uneasiness about receiving directions from the FRC on how to discipline its members in situations in which ACCA had not been a party to the investigation or the determination of the sanction. Most importantly, the sanction may not be in line with current ACCA policy or practice.

We have set out below our specific concerns regarding the clarity, completeness and fairness of the draft Procedure. We acknowledge that there are not expected to be a high number of Audit Quality Review (AQR) inspections to ACCA firms. However, we would like to point out that paragraph 1.2 of the background to the consultation paper does not relate to ACCA. ACCA’s Admissions and Licensing Committee comprises a lay majority, and is constituted from a panel appointed by a Sub-committee of ACCA’s Regulatory Board. The Regulatory Board itself has a lay majority, and further information concerning ACCA’s regulatory oversight arrangements may be found in the Regulatory board section. 

Specific comments

Generally, we believe that the Procedure could be made significantly more understandable. For example:

i. Every attempt should be made to avoid vagueness in the Procedure. An example of this appears in paragraph 4.1(a), which refers to a Registered Auditor’s continued registration adversely affecting a major audit client or ‘any other person’.

ii. It may be possible to enhance clarity though greater consistency and clarity of language and terminology. It appears that the draft Procedure intends to set out how a sanction may be determined by the Monitoring Committee – with the consent of the Registered Auditor – or by the Independent Sanctions Tribunal (IST) – without such consent – and that the RSB is directed to impose the sanction on its member. The word ‘determine’ appears in paragraphs 2.1 (interpretation of ‘regulatory penalty’), 8.1, 12.9(a) and 12.9(c). However, the draft Procedure refers to sanctions being ‘ordered’ by the IST in paragraphs 12.5, 12.6, 12.8, 12.11 and 19.1. We propose that ‘determined’ is, in fact, the appropriate word to be used throughout.

iii. The procedures relating to publicity could be brought together in a single section. Currently, the draft Procedure refers to the publishing of sanctions in sections 7.4 (where a sanction has been agreed with the Monitoring Committee) and 12.9 (where a sanction has been determined by the IST).

iv. It is not clear why sanctions determined by the IST are to be published by the Monitoring Committee.

v. It is unclear what affect the different procedures of the various RSBs would have in practice, and paragraph 1.4 of the background information in the consultation paper would suggest that ACCA has not been considered along with ICAEW, ICAS and Chartered Accountants Ireland in this respect. One such inconsistency in procedures might relate to the recovery of fines and costs. ACCA, for example, would exclude someone from membership for the non-payment of any debt to ACCA. What will the FRC do if costs ordered (or directed) are not paid to the FRC?

vi. The Procedure must make clear that it relates to United Kingdom audit clients only. We understand that reference to the RI 1990 Act is relevant to the precise definition of an RSB and the understanding of ‘Registered Auditor’. However, the work of the Conduct Committee does not extend to Registered Auditors and audit entities in the Republic of Ireland, and so it would be preferable to define these terms in the context of the Auditor Regulatory Sanctions Procedure.

Yes, we agree that the draft Procedure would provide enhanced protection to the public, while setting out a fair process for those subject to the Procedure (subject to our comments under Question 4 below). However, greater clarity is required in the document in order to demonstrate this balance.

Yes. The following are worthy of further consideration:

i. What procedure will take place if undertakings given by a Registered Auditor are not honoured?

ii. The procedure does not set out the repercussions of non-compliance with an order imposed by an RSB in each case. It appears that any sanction determined by the Monitoring Committee or the IST will result in a direction to the relevant RSB to impose the sanction. If that RSB fails to recover a regulatory penalty, or a Registered Auditor fails to comply with restrictions or conditions imposed on its registration, what intervention by the FRC would be appropriate?

iii. Is there a maximum fine that may be determined by the Monitoring Committee or the IST?

iv. Paragraph 12.5(a) of the draft Procedure states that the IST may determine such sanction ‘as it considers appropriate’. There is no reference to any sanctions guidance criteria. Similarly, there is no indication of how the Monitoring Committee may determine that a particular sanction is appropriate.

v. Paragraph 14.2(e) states that an accountant serving on the IST must be ‘a Member of a professional accountancy body whether or not that body is an RSB’. We note that ‘professional accountancy body’ is not defined, although we assume that this should not include a body whose members are not qualified to conduct audits (for example a professional body of bookkeepers).

vi. Paragraph 17 of the draft Procedure is entitled ‘Postponement and Adjournment’. However, its provisions only relate to postponement, and not adjournment. (Paragraph 17.2 refers to neither postponement nor adjournment.)

We should like to raise the following comments:

i. Paragraph 12.3 of the draft Procedure appears unreasonable. We would be interested to know why the FRC considers evidence that would not be admissible in a court appropriate for consideration by the IST when coming to its decision. We believe that the FRC should place greater importance on fairness and openness when redrafting the Auditor Regulatory Sanctions Procedure.

ii. According to paragraph 14.2(f) of the draft Procedure, former members of the governing bodies and former officers and employees of the RSBs may be appointed to the IST after a ‘cooling off’ period of one year. This period seems brief, and the rationale has not been explained. ACCA requires a period of three years before a former employee or Council member may serve on its regulatory or disciplinary Committees, and in the case of auditor independence and employment relationships (according to Ethical Standard 2 Financial, Business, Employment and Personal Relationships), the relevant period is two years.

iii. Paragraph 4.2 of the draft Provision lists ‘Suspension of Registration’ among the available sanctions, but paragraph 4.3 explains that, during a period of suspension, a Registered Auditor may continue to act as auditor for existing clients. The latter paragraph requires detailed review and revision. In our opinion, a recipient of the publicity concerning such a sanction would not consider the conditions in paragraph 4.3 to amount to a suspension.

The only proposed restrictions for the suspended auditor firm are that it may not accept any new appointments and that it may only ‘sign’ audit reports with the permission of the Monitoring Committee. We should like clarity concerning whether these restrictions will apply only in respect of major audit clients. Furthermore, it is unclear in what circumstances a Registered Auditor would be permitted to act as auditor but denied permission by the Monitoring Committee to sign the audit report.

iv. We note that withdrawal of registration is also an available sanction. While this would usually be a sanction favoured by ACCA (requiring reapplication when appropriate), we would expect this sanction to be determined rarely under the Auditor Regulatory Sanctions Procedure, as it would require the Registered Auditor to resign from all audits, and not just those of public interest entities.

v. We note that all meetings and hearings are to be conducted in private, and we have considered the appropriateness of this in view of the fact that they will often concern public interest entities. While it may be asserted that this is not best practice, sanctions are to be considered against the Registered Auditor, rather than the audit client, and there will often be a strong argument in favour of protecting the identity of the client.

Counter to this is the argument that supports the regulatory principle of transparency. A hearing of the IST will take place when the Monitoring Committee has failed to agree a sanction with the Registered Auditor and, therefore, the circumstances of the hearing would be expected to be somewhat contentious. Under such conditions, the FRC would wish to avoid criticism that sanctions were being ‘agreed behind closed doors’.

These two opposing views illustrate the challenge that remains for the FRC concerning whether or not it is in the public interest for hearings of the IST to take place in private.

vi. Paragraph 2.3 of the outline of the proposed Procedure states that AQR staff may attend meetings of the Monitoring Committee, although Registered Auditors may not attend. This does not appear to be reflected in paragraph 13.2 of the proposed Procedure, which states that the meetings may be attended by anyone for the purpose of advising the Monitoring Committee on its ‘duties, powers or procedures and the law’ or by ‘any other person permitted by the Monitoring Committee’. In any case, in our opinion, the imbalance suggested by paragraph 2.3 of the outline is unacceptable, both in practice and appearance.

vii. Paragraph 10.1 refers to the appointment of an IST in accordance with paragraph 17, although the relevant provisions for appointment of an IST are, in fact, within paragraph 14.

While ACCA supports the enhanced regulatory independence of the FRC demonstrated by the development of the Auditor Regulatory Sanctions Procedure, we suggest that the concerns expressed above require careful consideration by the FRC, in order to enhance the clarity of the Procedure, and demonstrate due regard for the principles of justice and better regulation.