The content on this page has been converted from PDF to HTML format using an artificial intelligence (AI) tool as part of our ongoing efforts to improve accessibility and usability of our publications. Note:
- No human verification has been conducted of the converted content.
- While we strive for accuracy errors or omissions may exist.
- This content is provided for informational purposes only and should not be relied upon as a definitive or authoritative source.
- For the official and verified version of the publication, refer to the original PDF document.
If you identify any inaccuracies or have concerns about the content, please contact us at [email protected].
Guidance on the opening of AEP Investigations (Jan 2021)
Guidance on the opening of AEP Investigations
Thresholds/Guidance for referral for investigation
January 2021
1Under Rules 4 & 5 of the Audit Enforcement Procedure, where the Board considers that there is a good reason to investigate an alleged failure to comply with a relevant requirement, it shall refer the Allegation for investigation and may direct the investigation to be undertaken by a Recognised Supervisory Body (“RSB”) where appropriate
2Under Part 8 of the Audit Enforcement Procedure, the Board may reconsider a decision of the Case Examiner made under Rule 3 or of the Board pursuant to Rule 4 subject to the test set out in Rule 70.
3The Board can delegate its functions under Rules 4, 5 and 70 to the Conduct Committee.
4This document provides guidance on when Allegations may be referred for investigation. The purpose of this guidance is to ensure that consistent and proportionate decisions are taken, although it is recognised that every Allegation will have its own unique facts and circumstances.
5This guidance will be referred to by the Board and may be helpful for anyone interested or involved in the FRC's Audit Enforcement Procedure.
Considerations
6When determining whether there is a good reason to investigate an Allegation, regard should be had to the EU Audit Regulation and the expectation that Member States shall ensure that there are effective systems of investigations and sanctions to detect, correct and prevent inadequate execution of the statutory audit.
7This illustrative list sets out examples which might suggest a good reason to investigate but it is important to note that the list is non-exhaustive and none of the following characteristics are a pre-requisite in order to satisfy the threshold for investigation:
- it has the potential to damage public confidence in Statutory Audit or the audit profession;
- it has the potential to damage investor confidence in the truth and fairness of the financial reporting of an entity;
- it may have contributed directly or indirectly to financial detriment or other harm to those reliant upon the statutory audit process;
- it may have contributed directly or indirectly to financial detriment or other harm to a number or vulnerable category of individuals or institutions;
- it may suggest possibly pervasive conduct reflecting the number of institutions involved and/or the length of time the alleged breach(es) persisted;
- it may suggest the financial information is inaccurate or incomplete;
- it may suggest criminal offences have been committed;
- it may suggest a failure in regulatory compliance processes or approach;
- it may suggest a failure to adhere to ethical standards; and/or
- It will assist the FRC in pursuing its objectives of promoting high quality audit and detecting, correcting and preventing inadequate execution of the statutory audit.
8Conversely the following illustrative list sets out non-exhaustive examples of where the it may be decided that there is not a good reason to investigate. It is important to note, however, that the presence of one or more of these factors does not necessarily preclude a finding of a good reason to investigate:
- no potential to damage investor confidence in the truth and fairness of the financial reporting of an entity;
- limited or no financial detriment or other harm to those reliant upon the statutory audit process;
- an isolated incident; and/or
- a minor breach of the Relevant Requirements.
Delegation of Investigations and Oversight of Investigations
9If an Allegation is referred for investigation a direction must also be made as to whether the investigation should be delegated to the appropriate RSB. Factors which may be relevant to such a direction include:
- whether the Allegation relates to a public interest entity and has been brought to the Board's attention as a result of the FRC's audit monitoring activity in the FRC's capacity as competent authority (in which case delegation to an RSB is not permitted by law);
- the seriousness of the Allegation;
- the number of factors as set out at paragraph 7 above;
- the complexity of the Allegation;
- the public profile (or anticipated profile) of the Allegation;
- the capacity and capability of the RSB to whom the Allegation would be delegated;1
- the capacity within the FRC to conduct the investigation; and/or
- the likely resources required for the investigation (including costs).
10Where the Board has delegated its decision-making under Rules 4 and 5 and 70 of the Audit Enforcement Procedure to the Conduct Committee, references in this Guidance to the Board should be read as referring to the Conduct Committee, as applicable.
Issued by the Board with effect from 1 January 2021.
The FRC's mission is to serve the public interest by setting high standards of corporate governance, reporting and audit and by holding to account those responsible for delivering them. The FRC sets the UK Corporate Governance and Stewardship Codes and UK standards for accounting and actuarial work; monitors and takes action to promote the quality of corporate reporting; and operates independent enforcement arrangements for accountants and actuaries.. We also represent UK interests in international standard-setting. As the Competent Authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
The FRC (which includes the FRC's officers, appointees, employees and agents) does not accept any liability to any party for any loss, damage or costs howsoever arising, whether directly or indirectly, whether in contract, tort or otherwise from any action or decision taken (or not taken) as a result of any person relying on or otherwise using this document or arising from any omission from it.
© The Financial Reporting Council Limited 2021 The Financial Reporting Council Limited is a company limited by guarantee. Registered in England number 2486368. Registered Office: 8th Floor, 125 London Wall, London EC2Y 5AS
-
Capability may include matters contained in or as a result of any delegation arrangements with the particular RSB ↩