News November 2017 FRC announcements in connection with Mitie Group plc’s 2016 annual report and accounts

FRC announcements in connection with Mitie Group plc’s 2016 annual report and accounts

20 November 2017
PN 54/17                                                                                                     

The Financial Reporting Council (FRC) today announces the following matters in relation to Mitie Group plc (Mitie):
  • Its decision to open an investigation under the Accountancy Scheme in relation to the preparation and approval of the financial statements for Mitie Group plc for the year ended 31 March 2016. This is in addition to the FRC’s ongoing investigation, announced on 31 July 2017, in relation to the conduct of Deloitte LLP’s audit of Mitie under the Audit Enforcement Procedure (AEP). The press notice relating to it can be found here.
  • The conclusion of its Corporate Reporting Review team’s review of the annual report and accounts of Mitie for the year ended 31 March 2016, which was initiated on 13 October 2016.
Investigations under the Accountancy Scheme and the AEP
We will report as appropriate in due course on the outcomes of the investigations referred to above.
Corporate Reporting Review of Mitie Group plc’s 2016 annual report and accounts
The FRC raised certain issues with the company following its review of the 2016 annual report and accounts. These included issues relating to the impairment testing of the goodwill allocated to the Healthcare cash generating unit and a number of areas subsequently covered by the company’s Accounting Review, announced in its January 2017 trading update and initiated by its new Executive Management Team.
The company’s 2017 annual report and accounts discloses that its audit committee:
  • appointed KPMG to review the circumstances surrounding the judgement made on Healthcare goodwill at 31 March 2016 following new evidence coming to light during the course of preparing the company’s response to the FRC’s enquiries, which had not previously been provided to the external auditor, the audit committee or the board.
  • concluded that one or more errors were made in the preparation of the plan that formed the basis for the impairment testing of Healthcare goodwill at 31 March 2016. This resulted in the recording of a prior year adjustment to goodwill at 31 March 2016 of £26.0 million.
  • also concluded that a number of other judgements were made in respect of the impairment testing of Healthcare goodwill at 31 March 2016, which were impacted by the discovery of further information and were considered as part of the preparation of the 2017 annual report and accounts. Had these matters been regarded as prior year errors, rather than changes in judgement, the amount of the prior year adjustment would have increased by £44.0 million.
As a result of the company’s Accounting Review, the adjustments reflected in its 2017 annual report and accounts and further explanation provided by the company, the FRC considers that its concerns have been satisfactorily addressed.
Notes to editors:
  1. The FRC’s mission is to promote transparency and integrity in business.  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. As the competent authority for audit in the UK the FRC sets auditing and ethical standards and monitors and enforces audit quality.
  2. The Conduct Committee is authorised under the Companies Act 2006 (the Act) to review the annual accounts, strategic and directors’ reports of public and large private companies to see whether they comply with the requirements of the Act, including applicable accounting standards.
  3. Where a company’s accounts, strategic or directors’ report are defective in a material respect the Conduct Committee will, wherever possible, try to secure their revision by voluntary means. If this approach fails, the Conduct Committee is empowered to make an application to the court under section 456 of the Act for an order for revision.
  4. The Conduct Committee maintains a Financial Reporting Review Panel (FRRP) from which Review Groups may be appointed to consider individual matters. The Chairman of the FRRP is Geoffrey Green and the Deputy Chairs are John Hitchins and Andrew Vials. There are currently 24 other members drawn from a broad spectrum of commerce and the professions.
  5. In relation to enforcement matters, the FRC is the independent, investigative and disciplinary body for accountants and actuaries in the UK dealing with cases which raise important issues affecting the public interest.
  6. In brief, the stages of the disciplinary process under the Accountancy Scheme are:
  • Decision to investigate
  • Investigation
  • Decision whether to bring enforcement proceedings against Member Firm or Member and, if so decided, referral to Disciplinary Tribunal
  • Tribunal hearing
  • Determination and imposition of sanction and/or costs orders
Under the Accountancy Scheme the FRC can start a disciplinary investigation in one of two ways: (i) the professional bodies can refer cases to the FRC; and (ii) the FRC may decide of its own accord to investigate a matter. The Conduct Committee will consider each case identified or referred to it and decide whether or not the criteria for an investigation are met.

The criteria are specified in paragraph 5(1) of the Accountancy Scheme. A Member or Member Firm shall be liable to investigation under this Scheme only where, in the opinion of the Conduct Committee the matter raises or appears to raise important issues affecting the public interest in the United Kingdom and there are reasonable grounds to suspect that there may have been Misconduct or it appears that the Member or Member Firm has failed to comply with any of his or its obligations under paragraphs 14(1) or 14(2) of the Scheme.

Investigations are conducted by Executive Counsel and the Enforcement division.
  1. To meet its responsibility as the competent authority in respect of audit enforcement, the FRC operates the Audit Enforcement Procedure.  This procedure applies to the investigation and sanctioning of breaches of the various requirements of the statutory auditors of Public Interest Entities (PIEs) and any other cases retained by the FRC including AIM companies with a market capitalisation in excess of €200m. 

    In brief, the stages of the Audit Enforcement Procedure are:
  • Initial case examination and decision to investigate
  • Investigation
  • Decision by Executive Counsel as to whether to issue a Decision Notice (a notice with the findings and recommended sanction);
  • Referral to Enforcement Committee and decision by the Enforcement Committee whether to issue a Decision Notice; and
  • Referral to a Tribunal.

    In order for a matter to be referred for investigation by the FRC’s Executive Counsel under the Audit Enforcement Procedure, the FRC’s Conduct Committee is required to decide whether there is good reason to investigate an Allegation in relation to a Statutory Auditor and/or a Statutory Audit Firm.

    Investigations are conducted by Executive Counsel and the Enforcement division.