In an unprecedented move, the Financial Reporting Council (FRC) has issued a record £48.2 million in fines to various audit firms. This sharp increase surpasses the previous record of £46.5 million set in the 2021-22 financial year.
These fines primarily target major audit firms including KPMG, EY, PwC, and Oliver Clive & Co for significant audit failures. The FRC’s growing assertiveness is evident as it transitions into the new Audit, Reporting and Governance Authority, prioritised by the Labour Party.
Record Penalties and Their Reductions
The FRC’s recent imposition of fines marks a notable escalation in regulatory enforcement. Originally totalling £48.2 million, these fines were reduced to £33.1 million after applying discounts for early admissions and cooperation. This contrasts with the £28.5 million paid the prior year, showing a significant rise, albeit still below the record £34.6 million of 2021-22.
Despite issuing only eight fines last year, the fewest since 2020-21, the cases were exceptionally high-profile. The collapse of Carillion in 2018 was a pivotal case, with its auditor KPMG facing intense scrutiny for ‘textbook’ audit failures.
KPMG and Carillion Case
Carillion’s collapse led to a major FRC investigation into KPMG. The firm was found guilty of severe lapses in audit processes, termed ‘textbook’ failures by the regulator.
The investigation concluded with KPMG receiving a record £30 million fine, which was eventually reduced to £21 million due to their admissions and cooperation. This case underlines the FRC’s commitment to holding major firms accountable.
Punishments for EY, PwC, and Oliver Clive & Co
The significant penalties weren’t limited to KPMG. EY and PwC were also under the FRC’s scanner for their roles in auditing London Capital & Finance, an investment group embroiled in a massive retail savings scandal.
EY and PwC were hit with £7 million fines each. These were reduced to £4.9 million for EY and £4.4 million for PwC, following their cooperation with the investigation.
In addition, the smaller audit firm Oliver Clive & Co was fined £60,000, which was later brought down to £42,000. This is a clear indication that the FRC’s regulatory net casts wide, targeting firms of all sizes.
Elizabeth Barrett’s Remarks
Elizabeth Barrett, the FRC’s Executive Director of Enforcement, remarked, ‘The past year was notable for the completion of several high-profile and complex cases at the FRC.’
Barrett emphasised that the FRC would continue to prioritise fair, robust, and proportionate enforcement outcomes. This approach is designed to uphold trust in financial reporting and audits, thereby supporting investor confidence in UK businesses.
Improvements in Investigation Timelines
The audit firms have often criticised the FRC for the prolonged duration of its investigations. However, the regulator has shown significant improvements in this area.
In the past year, eight out of the nine concluded investigations were completed within three years, a considerable improvement from previous years. This is a positive development for both the regulator and the audited firms.
Moreover, the FRC initiated six new investigations last year, leaving it with 35 ongoing cases, a slight decrease from 38 the previous summer.
Labour Party’s Role and Future Outlook
The Labour Party has pledged to prioritise the transition of the FRC into the more robust Audit, Reporting and Governance Authority. This move is expected to further enhance the regulatory framework governing audit firms in the UK.
The increased fines and rigorous enforcement actions serve as a clear warning to audit firms about the consequences of failing to meet required standards.
This transition is anticipated to bolster investor confidence and promote economic growth by ensuring greater accountability and transparency in the audit process.
The FRC’s record fines signal a strict stance on audit failures, aiming to promote integrity within the industry.
As the FRC transitions into a more robust authority, it sets a precedent for audit firms to adhere to the highest standards, thereby fostering enhanced trust in the financial ecosystem.
