FRC’s new Sanctions Guidance – the changes considered

FRC's new Sanctions Guidance – the changes considered

The FRC's new Accountancy Scheme Sanctions Guidance took effect on 1 June 2018. At this challenging time for both the profession and its regulator, a great deal is riding on how this new guidance is interpreted in practice

The Financial Reporting Council’s (FRC) new Accountancy Scheme Sanctions Guidance took effect on 1 June 2018. At this challenging time for both the profession and its regulator, a great deal is riding on how this new guidance is interpreted in practice. We look to the FRC, with an incoming new Executive Counsel, to strike the right balance.

Political and media pressure for tougher regulation of audit has probably never been stronger than it is now, nor so ill-informed. UK auditors generally do an excellent job, but regrettably positive news stories do not sell.  Higher fines and harsher sanctions may change behaviours, but not necessarily with the result that we have better auditing. This is particularly so if we witness a drain of accountancy talent, with a generation of graduates put off becoming auditors due to the increasingly harsh regulatory environment facing practitioners.

Depending on how they are implemented, there are some potentially welcome changes in the new guidance. Prior breaches by the member firm are no longer an automatic aggravating factor. The similarity of the breaches, time elapsed, and remedial action will all be taken into account. The Tribunal may not consider a breach in one business area or office as an aggravating factor for others, in a sensible recognition of the nature of modern large accounting firms. In addition, a Tribunal will now have to take into account sanctions imposed by another regulator, where previously they were not permitted to. This avoids a situation of “double jeopardy” for someone under investigation by more than one regulator. Moreover, a “sanctions package” need no longer include any fine at all if the other sanctions achieve their goal, which represents a welcome emphasis on remediation rather than deterrence. Deterrence has been de-emphasised in what seems to be a fundamental shift of approach, while failure to remediate is now a very significant aggravating factor. It will be very interesting to see how this plays out in the level of fines and sanctions imposed in forthcoming cases.

Other changes are less welcome, however. On settlement discounts, changes now encourage (very) early settlement. Although rewarding and thus encouraging early settlement is in principle uncontroversial, the form this encouragement takes in the new guidance may place pressure on parties under investigation to accept a Proposed Formal Complaint wholesale, or else lose a significant discount. This, in our view, could lead to injustice, particularly where a complaint includes errors of fact or unfounded allegations.

There is also effectively reduced discretion to apply a discount for “cooperation” and a party under investigation will now need to show “exceptional” levels of cooperation to access the discount, such as by self-reporting or volunteering information without being asked.

“Discretion” is a watchword of the new guidance. The Tribunal has explicitly been given discretion to ignore precedent when imposing sanctions. This – allied with a new focus on the worthwhile (but diffuse) aim of “promoting public confidence” in the profession – could pave the way to swingeing new fines. The new guidance, if applied harshly, provides a gateway to fines being imposed in response to public and press criticism of the profession and its regulator – criticism which we often find to be ill-founded.  The guidance grants greater discretion to determine the appropriate discount. Whilst we hope that in practice this discretion will be applied fairly, to allow for increased discounts where it is fair and appropriate to do so, there is a tension between acting reasonably and being seen to be tough in applying regulation.

Discretion, of course, can be used for good or ill. We hope that the FRC and the Tribunals it appoints use the new guidance to impose sanctions fairly and consistently when seeking to improve the quality of audit and the profession in its widest sense. It is this – we contend – that will best promote improved audit quality and public confidence in the long term. Disciplinary proceedings and sanctions concern alleged misconduct. We hope that fairness to the professional under investigation is not sacrificed on the (short term) altar of political and media judgment.

Richard Highley is a partner and Julian Bubb Humfryes, a solicitor, at international law firm DAC Beachcroft.

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