FRC Fines to Audit Firms Jump 44% in a Year to Record High of £24.3m

The value of fines issued by the Financial Reporting Council (FRC) to audit firms rose 44% last year (year-end 30^th September) to £24.3m, up from £16.9m the year before, says Thomson Reuters.

The increase in fines is seen as setting the tone for its replacement, the Audit Reporting & Governing Authority (ARGA), which is expected to launch by March 31 2020. ARGA will be granted powers to impose tougher fines.

Following the collapse of several of high-profile listed companies, such as Carillion and Patisserie Valerie, the Government backed the granting of tougher powers to ARGA in order to help deliver an improvement in the performance of audit firms.

In advance of ARGA’s establishment, the FRC plans to invest further in its enforcement teams. The FRC is involved in 10 investigations including inquiries related to the audits of Interserve, Conviviality and Thomas Cook.

Strong regulatory approach to auditors seen across the Atlantic

Additional research shows that regulators in the US have also been taking a tougher approach to the regulation of auditors with far of fines over the last year.

The value of fines for audit failures imposed by the Securities & Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB) hit $64.7m last year, up from $12.5m the year before. This does include a few particularly high value fines.

Growth in the value of fines comes as regulators adopt an increasingly collaborative approach, which is likely to be felt by audit firms with large international footprints. Over 50 accountancy watchdogs globally are now part of the International Forum of Independent Audit Regulators (IFIAR) which provides a platform for sharing information and coordinating cross-border investigations.

IFIAR also holds an annual meeting as well as more specialised working groups where regulators come together to discuss emerging regulatory issues and practical approaches to dealing with them. There is a working group dedicated to enforcement.

Brian Peccarelli, chief operating officer, Customer Markets, Thomson Reuters, says: “The increase in fines has set a clear direction of travel for the FRC as it transitions into a new entity.”

Audit industry responds with increased capex

Thomson Reuters says that in response to pressure from the regulator, many audit firms are starting to increase their capital expenditure on technology to improve audit standards.

Technological advances are also giving audit firms new ways to analyse data. For example, Artificial Intelligence is being used to analyse a variety of data sources at once; such as legal contracts, invoices, reports and even social media, to extract the key bits of information required by an auditor.

Emerging technologies being piloted in this field include the use of drones to assess the inventory of a company that then feeds this information back to a database.  

Brian Peccarelli adds: “There is pressure being heaped on audit firms and the wider industry to stamp out any incidents of malpractice. Firms look to be taking this onboard and implementing new processes to ensure nothing slips through the net.

“Rising fines and enforcement action is not just a UK phenomenon. The approach of regulators is becoming more and more coordinated – boards should take note.”

Value of fines imposed by US regulators for audit failures has also increased – value of fines

2016/17    $18.6 m

2017/18    $12.5 m

2018/19    $64.7 m

Thomson Reuters

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