Why has my company been targeted?
The Panel selects accounts for review in a number of ways.
- The Panel discusses with the FSA and the FRC’s Standing Advisory Group which sectors of the economy are under strain or likely to give rise to difficult accounting issues. The Panel then selects a number of sectors and reviews a selection of accounts in each. The Panel also publishes its sector selection.
- The Panel has its own risk-based approach to identify cases where accounting problems are more likely – cases of poor corporate governance for example.
- The Panel looks at specific topical accounting issues and comments in the business and professional press.
- The Panel may have received a complaint about your accounts.
Can I find out why my company has been targeted?
In general, no. As explained above, there are a number of reasons why a company’s accounts may be chosen for review. The Panel will not generally disclose the reason for selection and will not disclose whether there is a complainant in the case.
Have the tax authorities complained about our accounts?
HM Revenue and Customs can refer cases to the Panel but they will tell the company in advance in accordance with its Memorandum of Understanding with the Panel.
The letter states that the Panel has not yet opened a formal enquiry into the accounts of the company and is requesting further information to enable it to decide whether it should do so. What is the difference between asking questions about the accounts and opening a formal enquiry?
Initially, the Panel raises questions with a company where there is, or may be, a question as to whether the accounts comply with relevant accounting and reporting requirements.
If, after considering additional information and explanations, the Panel believes that there is still a possibility of a significant breach of accounting or disclosure requirements, then it will open a formal enquiry in order to investigate the matter in more detail. When a formal enquiry is opened, a Panel Group will be established to consider the matter.
Can the Panel’s questions be resolved without a formal enquiry being opened?
Yes. When the Panel believes that it has sufficient information on the issue, it may decide that the accounting or reporting treatment was appropriate, or that action proposed by the company will be sufficient to remedy the problem, or that there are insufficient grounds for pursuing the issue further. In all these cases, the Panel will then close the case without opening a formal enquiry.
If no Panel Group is established until after a formal enquiry is opened, who is looking at the accounts up to that date, and who decides whether or not to open an enquiry?
Accounts are initially reviewed by Panel staff who provide the Panel Chairmen with a preliminary analysis and recommended course of action. The Chairmen can also consult with Panel members or external consultants during the initial consideration of a case before deciding whether to open an enquiry.
What should I do when I receive a letter?
First of all, you should acknowledge receipt of the letter and tell the Panel when you expect to be able to make a substantive response. The Panel would usually expect to receive a considered response within three to four weeks of receipt. If, exceptionally, you consider that it will take longer to respond, or if you are approaching a reporting date, then you should discuss this with the Panel Secretary as soon as possible. The Panel expects companies to respond to its enquiries reasonably promptly and reserves the right to comment adversely on those who do not.
The letter from the Panel asks me to respond by e-mail. What does this mean and do I have to use e-mail?
The Panel expects companies to prepare their response as a formal letter. In all cases, a signed copy of the letter should be posted to the Panel’s address. To avoid postal delays, the company may like to e-mail a copy of the letter, in PDF format, to the Panel Secretary, at panel.secretary@frc-frrp.org.uk, as well as sending a hard copy by post. It would be preferable to receive your response by e-mail. It is, however, the company’s choice as to whether to do so.
I would like to receive the Panel’s reply by e-mail. How do I indicate this?
If you would like the Panel to send its reply by e-mail, as a PDF attachment, to the signatory of the company’s letter, simply say so in your response. Please advise the e-mail address(es) to use at the end of your letter. The Panel will not use the “reply” or “reply to all” buttons from the e-mail exchange. In all cases, the Panel’s signed letter will follow by post.
What do I need to consider in preparing my response?
The Panel often raises questions because it has not been possible to tell from the published accounts whether the accounting treatment adopted for a particular transaction complies with relevant accounting and reporting requirements. In many cases, the matter can be resolved simply by providing full information about the transaction and the reasons for the accounting treatment adopted. Details of the accounting standard or other requirement that has been followed should be included.
A full response can often lead to an early closure of the matter. Conversely, where the Panel does not receive a sufficiently detailed response to allow it to reach a conclusion, the company can expect to receive further requests for information.
If, as a result of considering the matters raised by the Panel, you believe that a change in accounting policy, or a correction of numbers or disclosures, is advisable, you should discuss this with the Panel before taking corrective action.
The letter from the Panel has an appendix which lists a number of points for me to consider when preparing my next report and accounts. Do I need to reflect all of these?
You need only consider additional disclosures if they are relevant and material to your next report and accounts.
The reason that we have not given a specific disclosure is because the amount is not material. Will the Panel still insist on the disclosure being made?
Not at all. Accounting standards do not apply to immaterial items and the Panel takes the same approach. The Panel may, however, ask the company to explain why the company believes that an item is immaterial if this is not evident from the accounts. The Panel discourages companies from including unnecessary information in their accounts and would encourage companies not to include disclosures unless the additional information is material.
Should I discuss this issue with my auditors?
There is no requirement to do so, but it is generally advisable to discuss matters with your auditors at an early stage. Your auditors may already have considered the issue that has been raised and will be able to assist in drafting a response. They can also attend any meetings with the Panel should you so wish. It is also helpful if you inform the Panel whether or not your reply has been discussed with your auditors.
Should I tell the Audit Committee?
There is no legal requirement to do so, but the consequences of a Panel investigation can be serious and the Panel would expect an Audit Committee to be informed from the outset. Again, it is helpful if you inform the Panel whether or not your reply has been discussed with your Audit Committee.
Do I need to inform the market?
Companies must take their own decisions about informing the market, with the assistance of advisers where necessary.
The Panel will generally only issue a press notice at a stage where agreement has been reached either to amend a set of accounts, or to revise the accounting treatment in future or where the Panel has decided to pursue a matter to court. A request by the Panel for information, or even the opening of a formal Panel enquiry, would not usually be considered inside information as, in many cases, the matter will be resolved by the provision of further information. The company directors are, however, responsible in each case for deciding whether the request for information or the setting up of a formal Panel enquiry constitutes inside information and whether to inform the market without delay.
Any public announcement by the company which refers to the Panel should be discussed with the Panel in advance.
Will there be a press notice?
Not necessarily. The vast majority of cases are resolved without a press notice. Press notices are issued only where a significant correction to published accounts is being made, including an agreed significant change to future accounts, or where there is a case that the Panel considers otherwise merits publicity.
Will the Panel keep matters confidential?
Yes. The Panel’s rules on confidentiality are set out in its Operating Procedures. Apart from the Chairmen, Panel members are normally not aware of enquiries which relate to Panel Groups other than their own. Information relating to each Panel case is maintained securely in the offices of the Secretariat and is retained in accordance with the Panel’s retention policy. Care is taken to ensure that there is no unauthorised access to such information by other persons within the general FRC office.
Is the Panel subject to the Freedom of Information Act?
Not currently.
In what circumstances would the Panel make the enquiry public?
The Panel may make an announcement at the conclusion of an enquiry where the directors have agreed that the report under review requires corrective action. The company will be invited to comment on any draft press notice.
The Panel may also make an announcement on any application to court and at the end of court proceedings.
Where the FRC considers that the public interest requires it, the FRC may request the Chairman of the Panel to state whether a particular report is under review. The Chairman may accede to this request, and may also make such a statement on his own initiative if he believes that public interest requires it.
The Panel reports publicly on the results of its enforcement activity on a regular basis. Unless a press notice has already been issued, this report would not normally refer to any company by name.
If the Panel issues a press notice, will it say that the company has broken the law?
The Panel is not a court and has no authority to make legal decisions. If the Panel believes that a company's annual report and accounts may not comply with the law, it will try to persuade the company to make its reporting compliant either by restatement or, more often, by making appropriate improvements in future accounts. The Panel's press notice will identify the matter at issue and, typically, will focus on the restatement and/or agreed improvements.
Does the Panel share otherwise confidential information about its enquiries with other authorities?
The Panel is permitted, under the Companies Act, to disclose information to the Treasury, the Bank of England, the FSA, the Department for Business, Innovation and Skills and HM Revenue and Customs.
The Companies Act also allows the Panel to disclose information to assist a body designated by the Secretary of State to exercise his functions relating to the supervision of auditors for the purposes of disciplinary proceedings relating to the performance of an accountant or auditor of their professional duties or to assist bodies similar to the Panel in other countries.
Where information is forwarded by the Panel to other bodies, the Panel would usually inform the company, but reserves the right not to do so.
Does the Panel share otherwise confidential information about its enquiries with other parts of the FRC?
The Panel’s sharing of information with other parts of the FRC is restricted by the same conditions that apply to information sharing with other authorities.
This means that the Panel can share confidential information with the Accounting and Actuarial Disciplinary Board and the Professional Oversight Board as these bodies satisfy the necessary criteria under the Companies Act as set out in the reply to the previous question. Confidential information cannot, however, be shared more widely within the FRC.
I believe that the Panel letter is the result of a malicious complaint. Can I find out whether this is the case?
No – the Panel does not reveal whether its approach is prompted by a complaint or its own review programme. It does not reveal the identity of complainants. However, it will look at the complaint before writing to you and will only write if it believes that there may be a case to answer.
The Panel has asked for copies of certain documents. Do I have to provide them?
The Panel relies upon the voluntary co-operation of companies. It does, however, have reserve power to require information under the Companies Act and which it aims to use sparingly. When it uses this power to require information, it will tell you that it is doing so.
I would like to discuss the matters raised. Can I ask for a meeting with the Panel?
The Panel recognises that matters are sometimes easier to progress at a meeting. In order to get the best out of a meeting, the Panel generally finds it more effective if all matters have been progressed as far as possible by correspondence first. The Panel’s experience is that the great majority of issues can be resolved in this way.
When the Panel believes it appropriate, it will suggest a meeting with the company. Broadly, there are two types of meeting.
The first type is a technical meeting. This is an informal meeting and is usually with one or two members of the Panel and Panel staff. The usual purpose of a technical meeting is to discuss complex accounting issues that may have arisen to ensure that both the Panel and the company fully understand the issues raised. Such a meeting may also be appropriate where the company’s business is specialised and the Panel feels it needs a better understanding of that business. No decision on corrective action would be taken at a technical meeting.
The second type of meeting is one with the Panel Group where the Panel has opened a formal enquiry. This provides an opportunity to provide further information about the company, discuss the various matters at issue and to make representations about the accounting treatment used. At this meeting, the corrective action to be taken, if any, may be discussed. The Panel would normally expect that a company’s finance director would attend and it is often advisable to invite the auditor as well. It is unusual for legal representatives to attend.
Panel members sit on the Panel on a voluntary basis and are often fully employed in senior positions elsewhere. To ensure that meetings take place on a timely basis, it is helpful if companies can be flexible in providing availability for such meetings.
I don’t agree with the Panel’s opinion. Can I appeal?
If a company continues to disagree with the Panel, the Panel can only seek to enforce its views by going to court to obtain an order requiring directors to restate a company’s accounts. The ‘appeal’ is therefore the court case, including any further appeal process that may be invoked by either party following an unfavourable judgement.
What penalties can the Panel enforce if it concludes that there has been a breach of accounting standards? Can the directors be made personally liable?
The only remedy open to the Panel is to obtain a court order requiring directors to restate the defective report and accounts. The court could require the company directors to pay the costs of restatement personally, including the costs of circulating revised statements to shareholders. The Panel has no powers against directors, but can refer matters to other authorities, including appropriate professional bodies.
To date, the Panel has not applied to the court for the revision of the report and accounts of any company. Agreement is usually reached between the Panel and a company on the appropriate action to be taken in any case where a breach of accounting or reporting requirements has been identified. This can involve the reissue of a set of accounts or can take the form of prospective correction, with improved or amended disclosures or accounting in future sets of accounts. In some cases, all that is needed is fuller disclosure to enable transactions and accounting treatments to be better understood by users.
What powers does the Panel have?
The powers of the Panel derive from the Companies Act 2006 and the Companies (Audit, Investigations and Community Enterprise) Act 2004. The Panel is the body appointed by the Secretary of State to enquire into the accounts of companies and, where necessary, apply for a court order requiring their revision. The Panel has also been authorised to keep under review periodic reports and accounts produced by issuers of listed securities that are required to comply with the accounting requirements of the listing rules. Where it thinks fit, the Panel is authorised to inform the FSA of any conclusions reached by it in relation to such reports or accounts.
The Panel has powers to apply to court to require the production of documents, information or explanations by a company or any officer, employee or auditor of the company where it appears to the Panel that there is, or may be, a question whether the annual accounts of a company comply with the requirements of the Companies Act.
The Panel’s powers also extend to directors’ reports, including the statutory business review.
See Powers for a full description of the Panel’s authorities and powers.
This is a very busy time for my company. Can I ask the Panel to delay its enquiry?
Defective accounts could mislead the public, so the Panel’s procedures need to allow for speedy rectification. The Panel does not, therefore, generally allow companies to delay the initiation of an investigation into its accounts. It does, however, recognise that there may be circumstances that make it difficult for a company to respond to its enquiries within what it considers to be a reasonable timeframe. For example, the company may be engaged in a takeover or acquisition, or the chairman or finance director could be absent. Where a company anticipates difficulty in responding to the Panel within a reasonable time, it should contact the Panel Secretary as soon as possible to discuss this. The Panel will consider these circumstances on a case-by-case basis.
The Panel’s enquiry has cost the company a lot of time and money. Can we claim compensation?
No. The Panel does not enter into correspondence with a company unless there are matters that have come to its attention that lead it to believe that there may have been a breach of accounting or reporting requirements.
The Panel does, however, aim to be proportionate in its approach. The Panel usually writes to companies only where there is a risk that the accounts may be materially in breach of reporting requirements which may, in turn, affect the decisions of users of the accounts.
The Panel tries not to raise trivial matters and assists companies in focussing their efforts on significant matters by distinguishing between points of substance and “appendix-style” points (see above) which do not require a response.
I am not sure about the correct accounting treatment to adopt for a particular transaction. Can I ask the Panel for clearance in advance of publishing the accounts?
The Panel does not operate a system of advance clearance and is unable to give advice to an entity or its auditors as to whether, in its opinion, a particular accounting treatment would or would not meet the requirements of the law or listing rules.
