FRC urged to fine Big Four firms penalties over £10m

An independent review into the Financial Reporting Council’s (FRC) enforcement sanctions system has suggested fines of over £10m for Big Four firms who have carried out “seriously poor” audit work.

The report, produced by former Court of Appeal judge Sir Christopher Clarke, stated that although it is not appropriate to set a tariff or range for financial sanctions, fines in the region of £10m would be appropriate for Big Four firms in relation to incompetence in audits of a major public company, particularly “where the errors were measured in nine figures or more and there had in consequence been either widespread actual loss or the risk thereof”.

Comparatively, the largest fine to have ever been issued by the FRC is £5.1m, given to PwC over their audit of RSM Tenon.

This suggestion was made with the assumption that there was no intention of wrongdoing, but if there was the report suggests the fine could be well above £10m.

The report explained: “Fines in single figure millions were only a small fraction of the revenues of members of the Big Four, which dwarf those of other firms.”

“There was a real danger that fines at this level would be regarded as no more than a cost of doing business and have little deterrent effect.”

The report made a series of recommendations including removing the requirement for tribunals to refer to previous cases when determining an appropriate sanction.

It also suggested giving greater attention to the use of non-financial penalties, which respondents suggested may be more effective in ensuring the objectives of sanctions were achieved. For example, on occasions where an individual was found to be dishonest, the report recommends exclusion from membership for at least 10 years.

Another suggestion was to offer discounts as an incentive to encourage timely settlement.

Also included in the report were a range of suggested amendments to the FRC’s Sanctions Guidance, suggesting it should include considerations of the level of cooperation of the individual or firm with the FRC, the impact on the firm due to their involvement in the investigation, and whether any remedial actions have been taken.

The FRC said it welcomed the report and is now carefully considering which recommendations to adopt.