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12 Dec 2013 12:59pm

FRC warns of boosted disciplinary charges

Professional accountancy bodies such as ICAEW and ACCA are going to have to pay more towards the Financial Reporting Council’s disciplinary cases

In the regulator’s 2014/15 draft plan and budget, published today, it forecasts that costs for 2013/14 are expected to be £7.7m compared with the original estimate of £5.0m. The FRC says this is due to a “large number of current cases flowing through to 2014/15.

“As at December 2013 we have three cases at tribunal stage (including one at appeal) and a further five cases where a formal complaint has been served in advance of a tribunal hearing."

We hope to see a genuine step change in the quality of bank and building society auditing in the UK

Baroness Hogg

One of the key cases for the FRC this year has been a record fine for Big Four firm Deloitte, which was fined £14m and given a severe reprimand by the FRC over its role as adviser to MG Rover. In November it was confirmed that Deloitte would be given leave to appeal.

The 2012 reform allowed unlimited fines to be levied in disciplinary cases.

The FRC’s draft plan today also announced a review of the quality of bank audits.

Following criticism of the auditing of banks, most recently KPMG’s work with the Co-operative, the FRC said it will focus on how bank and building society audits are conducted, and why they have been slow to improve.

The review will begin in the second quarter of 2014, as soon as this year’s audits have been completed, with a formal report expected to be published by the end of the year.

Baroness Hogg, FRC chair, said, “Concerns about the quality of auditing of banks and building societies persist, not least from our own inspections of audits and despite enhanced corporate governance requirements. We are clear that there is scope for improvement and we hope to see a genuine step change in the quality of bank and building society auditing in the UK.”

The review will focus on; what “specific actions” have been taken by the major firms to address issues identified in the FRC’s audit inspections of banks and building societies; how the major firms have assessed the effectiveness of actions they have taken; and focus on issues where recommendations have been made to specific audit firms.

Iain Coke, head of ICAEW’s Financial Services Faculty, said, “The FRC’s statement demonstrates that bank audits remain in the spotlight. People have high expectations of bank auditors, who need to continue to seek improvements in audit quality.

“ICAEW identified several improvement areas for bank audits early in the global financial crisis, working with audit firms, investors, CFOs and regulators. Many of the recommendations we set out then have now been implemented, such as improving the dialogue between regulators and bank auditors, enhancing the role of the audit committee and making the debates that happen in private between auditors, management and audit committees more visible to the wider public. The FRC’s review should also take these wider issues into account.”

The review of auditing the banks is one of list of priorities in the FRC’s 2014/15 plan. Following changes in European and UK law, and Competition Commission proposals, its other priorities include: monitoring and enforcing new changes in the audit market to “ensure this additional work delivers a notable improvement in audit quality”; promoting a longer-term approach to corporate governance and investor stewardship; promoting the importance of financial statements being true and fair; working to influence the EU and international developments; supporting smaller listed and AIM companies to enhance the quality of their reporting.

Our priority is not further change but ensuring these bed down properly

Stephen Haddrill

FRC chief executive Stephen Haddrill said, “Over the last year the FRC has delivered a number of key projects, including: enhanced standards for auditors and audit committees; the introduction of the ‘fair, balanced and understandable’ requirement for accounts and reports; more efficient disciplinary proceedings; the consultation on going concern and liquidity risks as proposed by Lord Sharman, and the implementation of new UK GAAP.

"As we move forward our priority is not further change but ensuring these bed down properly. We will however, also develop the capability to take on effectively the additional responsibilities required of us. The UK benefits greatly from the effectiveness and international credibility of its regulatory framework for corporate governance and reporting. Ensuring this framework serves the needs of investors without imposing disproportionate requirements and costs is vital. We will continue to work to ensure its strengths are properly understood in the EU and major capital markets.”

To fund its work programme, the FRC plans to increase its levies on the majority of account preparers and the professional bodies by 2.2%, with an increase of 4.8% in the rates applied to companies with a market capitalisation of more than £1bn.

The FRC is consulting on the plans until 28 February 2014, and comments should be sent to plan@frc.org.uk

Raymond Doherty

Helen Roxburgh

 

 

 

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