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Guidance on the opening of investigations (AEP)
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.
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Guidance on the opening of investigations under the Audit Enforcement Procedure
Thresholds/Guidance for referral for investigation
1Under Rule 9 of the Audit Enforcement Procedure ("the AEP") 1, where the Board considers that there is a good reason to investigate an alleged breach of a Relevant Requirement, it shall refer the matter for investigation and may direct the investigation to be undertaken by a Recognised Supervisory Body ("RSB") where appropriate.
1(A)Under Part 8 of the AEP, the Board may reconsider a decision of the Case Examiner made under Rule 5 or of the Board pursuant to Rules 6 and 10 subject to the requirements of Rules 131 to 134.
2The Board can (see Rule 2) delegate its functions under the AEP to the Conduct Committee.
3This document provides guidance on when alleged breaches of Relevant Requirements 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 alleged breach will have its own unique facts and circumstances.
4This guidance will be referred to by the Board and may be helpful for anyone interested or involved in the FRC's AΕΡ.
Considerations
5When determining whether there is a good reason to investigate an alleged breach of a Relevant Requirement, regard should be had to the expectation that the FRC as the competent authority for statutory audit should ensure that there are effective systems of investigations and sanctions to detect, correct and prevent inadequate execution of the statutory audit.
6This 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 is 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 to adhere to ethical standards;
- 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;
- in all the circumstances an investigation into the matter is proportionate including taking account of the amount of resource required and available for the matter or to Executive Counsel generally and over the potential time period.
7Conversely the following illustrative list sets out non-exhaustive examples of where 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
8If an alleged breach of a Relevant Requirement is referred for investigation a direction must also be made as to whether the investigation should be delegated to the appropriate RSB.
9Factors which may be relevant to such a direction include:
- whether the alleged breach of a Relevant Requirement 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 alleged breach of a Relevant Requirement;
- the number of factors as set out at paragraph 6 above;
- the complexity of the alleged breach of a Relevant Requirement;
- the public profile (or anticipated profile) of the alleged breach of a Relevant Requirement;
- the capacity and capability of the RSB to whom the alleged breach of a Relevant Requirement would be delegated 2;
- 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 the AEP 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 Conduct Committee with effect from 5 January 2022
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