48% rise in the value of fines issued to audit firms by the FRC – nearly £25m in 2019

There has been a 48% increase in the value of fines issued by the Financial Reporting Council (FRC) to audit firms in 2019. Fines issued to auditors have risen to £24.9m in 2019 (year to December 31) from £16.8m in 2018*, says RPC, the City-headquartered law firm.

RPC says the jump in fines reflects the FRC's hardening approach in the light of recent criticism of the FRC and of auditors.

The FRC has increased the size of its enforcement team recently. A former head of dispute resolution at a City law firm joined the FRC last year to lead its enforcement division. It is also adding a former FCA director of investigations to its team in February.

Further factors which RPC believe could have contributed to the increase in fines include:

• The EU Audit Regulation, which became effective in 2016. This expanded the FRC’s remit to cover a broader range of audits, increasing the potential for more fines.
• At the same time the threshold to launch an investigation was reduced following the FRC’s publication of its updated Audit Enforcement procedure
• The FRC’s revised sanctions guidance in June 2018 that encouraged tougher sanctions

Robert Morris, partner at RPC, says: “Whilst the FRC has been accused of lacking teeth, fines are of the scale where they are now causing real financial pain.”

“We are getting to the point where the FRC and its successor may want to be cautious about increasing the level of fines even further.”

“We are now seeing the impact of the regulatory changes that have been introduced over the last few years, which have given the FRC far more power to fine firms.”

“There could be heavier sanctions on the horizon following the recent Queen’s Speech, which said it would develop a ‘stronger regulator with all the powers necessary to reform the sector.’”

“The new regulator, ARGA, must ensure that its sanctions are fair and do not discourage firms from taking on work.”

Audit firms are making substantial investments in area such as big data and AI to improve the quality of their audits.