FRC introduces £10m sanctions for Big Four firms

FRC introduces £10m sanctions for Big Four firms

After increased pressure to take a tougher stance against Big Four firms for audit breaches, the FRC has implemented a range of sanctions

FRC introduces £10m sanctions for Big Four firms

Big Four firms could now face fines up to £10m for “seriously poor audit work”, as the Financial Reporting Council (FRC) has implemented recommendations from a 2017 sanctions review.

The review, chaired by former Court of Appeal Judge Sir Christopher Clarke, recommended that large fines would be appropriate for Big Four firms in relation to audits of major public companies, 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”.

The report said that fines in single figure millions were a small fraction of Big Four firm’s revenues and therefore may not have enough of a deterrent effect.

Currently, the largest fine doled out by the FRC was £5.1m to PwC for its audit of RSM Tenon in 2011. Meanwhile, the UK branch of the firm reported revenues of £3.6bn in 2017.

Other sanctions to be implemented include a minimum 10 year ban from the accounting profession for dishonesty and a greater use of non-financial penalties.

Carl Johnsons, partner and regulatory solicitor at the national law firm, Stephensons previously highlighted the 2017 report’s emphasis on the importance of non-financial penalties.

He notes that the report cited “the enforcement action taken against Deloitte Brazil following its audit of Gol Linhas Aereas Inteligentes SA as a ‘good example, in a very serious case, of the combination of financial and non-financial sanctions’.”

“The final penalty – in which Deloitte Brazil agreed a wide-ranging settlement with the Public Company Accounting Board (PCAOB) in the United States – included an $8m fine, a restriction on accepting certain audit clients, the appointment of an independent monitor to assess remedial action and additional training for audit staff.”

The new sanctions will come into effect on 1 June 2018.

These changes come at a time of increased pressure on the FRC to take a tougher stance against Big Four firms for neglectful or shoddy audit work, with high profile cases such as Carillion spurring the conversation.

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