The Financial Reporting Council (FRC) has made headlines with its historic number of fines imposed on audit firms in 2023.
These fines, amounting to a staggering £33.2 million, surpass the previous year’s record; the FRC’s intensified approach to enforcing audit standards has led to the significant increase. According to a report by Thomson Reuters, the accountancy regulator fined auditors £32.8m in 2021/22. The latest figure is nearly double that of the £19m recorded over 2020/21.
In 2023, audit firms paid a total of £40.4 million in penalties, including investigation costs. This figure is only slightly lower than the previous year’s total. KPMG, one of the Big Four accounting firms, bore the brunt of the fines, facing penalties for various audit shortcomings.
The largest fine, amounting to £21 million, was a consequence of failures in the Carillion audit, which marked the UK’s largest corporate collapse in 2018.
Fines and investigations
Last year, KPMG was involved in four out of five concluded FRC investigations, highlighting the firm’s struggles in maintaining audit quality.
The Carillion audit has been a focal point for the FRC’s mission to enhance audit quality. The collapse of Carillion, a major construction and facilities management company, exposed significant deficiencies in the auditing process. The FRC’s fines related to this audit send a strong message to the industry about the importance of thorough and accurate financial reporting.
In addition to the fine related to the Carillion audit, KPMG received fines for its work with Luceco, The Works, and Eddie Stobart.
PwC, another member of the Big Four, faced fines totalling £7.6 million for shortcomings in its audits of Stobart and Babcock. On the other hand, EY and Deloitte, also members of the Big Four, managed to escape fines but remain under ongoing investigations.
Transformation into the Audit, Reporting, and Governance Authority (ARGA)
The FRC is awaiting government approval for its transformation into the Audit, Reporting, and Governance Authority. This transformation aims to further strengthen the regulator’s powers and influence in the auditing industry. As part of this process, the FRC’s headcount has doubled over the past six years, reaching nearly 500 employees. The regulator’s commitment to enhancing audit quality is evident through this expansion.
The FRC’s intensified approach to enforcing audit standards has yielded positive results. In its latest assessment, 77% of audited reports were deemed either good or requiring limited improvements, marking the third consecutive year of improvement. This indicates that audit firms are making progress in meeting the FRC’s expectations and delivering accurate and reliable financial reporting.
While the FRC awaits the transition into ARGA, the UK Government has delayed the proposed audit reform. The FRC’s new CEO, Richard Moriarty, expressed the regulator’s desire to have enhanced powers earlier. Despite the delay, the FRC remains focused on its day-to-day work of enhancing public trust and confidence in audit, corporate governance, and financial reporting.
The role of technology
As part of its focus for the upcoming year, the FRC plans to promote the use of technology in audits. Digital reporting, in particular, is an area of emphasis for the regulator. By leveraging technology and automation, audit firms can increase their rigour and improve the quality of their audits. This shift towards technology-driven audits is expected to contribute to better financial reporting practices.
In preparation for the proposed regulatory reform, the FRC will prioritize internal upskilling and training. This initiative aims to ensure that auditors possess the necessary knowledge and skills to meet evolving industry standards. By investing in their workforce, audit firms can enhance their capabilities and deliver high-quality audits that meet the expectations of the FRC and the wider public.
A heavier crackdown
The Financial Reporting Council’s record fines imposed on audit firms in 2023 demonstrate its unwavering commitment to enhancing audit quality. The significant penalties, particularly in relation to the Carillion audit, serve as a wake-up call to the industry, emphasizing the importance of accurate financial reporting.
As the FRC awaits government approval for its transformation into ARGA, it continues to take a proactive approach in enforcing audit standards and promoting technological advancements in the auditing process. The fines imposed by the FRC send a clear message that audit firms must prioritise quality and compliance to restore and maintain public trust in the financial reporting system.