FRC urged to reconsider enforcement criteria amidst industry evolution

In a significant development for the UK accounting profession, the CEO of the Institute of Chartered Accountants in England and Wales (ICAEW) has advocated for the Financial Reporting Council (FRC) to recalibrate its enforcement parameters.

This comes amidst a broader conversation about making the accounting field more appealing and dynamically competitive.

Historically, the FRC’s enforcement actions pivoted on the notion of ‘misconduct.’ However, post-2017, this criterion shifted to non-compliance with relevant auditing standards, markedly lowering the threshold.

In an article in the Financial times, Michael Izza, said this had positioned auditors under the most stringent professional scrutiny in the UK. He suggests a moderated threshold that doesn’t revert entirely to the ‘misconduct’ era but finds a balanced midpoint.

This dialogue gains context with the recent directive from Kemi Badenoch, the UK’s business secretary, who in November tasked the FRC with bolstering economic competitiveness. This directive aligns with the government’s broader mandate to alleviate business regulatory constraints.

The FRC’s role in fostering a competitive profession, according to Izza, is critical. He envisions an environment that not only attracts talent but also respects and values professional judgment. This comes against the backdrop of the FRC imposing record fines in recent years, especially following significant corporate failures where auditing lapses were spotlighted.

In the financial year ending March 2023, the FRC imposed fines totalling £40.5 million, reflecting a robust enforcement landscape but slightly trailing the preceding year’s record of £46.5 million.

While awaiting enhanced governmental powers, Izza notes that the FRC can internally address certain competitive barriers, highlighting the heightened fines and the reputational impact of public rebukes on individual auditors.

The industry stands at a crossroads between stringent enforcement and nurturing a conducive environment for professional judgment.

Speaking to the Financial Times, Izza calls for a balanced approach, advocating for rigor in cases of gross incompetence or deception, while encouraging a more understanding stance on issues of judgment.

The FRC, under the new leadership of Richard Moriarty, signals a nuanced approach to enforcement, potentially reflecting a shift from the more punitive stance of his predecessor, Sir Jon Thompson. This shift is pivotal as the industry seeks to elevate its standards post-Carillion and other high-profile failures.

In its response, the FRC underscores its commitment to elevating audit quality standards. It emphasizes a balanced enforcement approach that marries constructive engagement with investigations, alongside its role as an improvement regulator.

As the UK accounting industry navigates these changes, the focus remains firmly on enhancing the profession’s attractiveness and strategic value. The evolving enforcement landscape is just one of many factors shaping the future of accounting in the UK.