UK accounting watchdog urged to raise threshold for enforcement action
London, January 4, 2024
Head of accountancy body says changes needed to make profession more attractive
The UK’s accounting watchdog should raise the threshold for bringing enforcement action against auditors, according to the boss of one of the industry bodies.
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, said the Financial Reporting Council should soften its approach to make the profession more attractive.
“Prior to 2017, if the FRC brought a case against an auditor, the threshold test that they were looking to meet was ‘misconduct’. That was lowered to non-compliance with the relevant auditing standards,” he told the Financial Times.
“That is now the lowest threshold of any professional in the UK. And it is our view that threshold is now too low. It probably shouldn’t go back to ‘misconduct’, but there’s somewhere in between that would be a more sensible area.”
His comments come after Kemi Badenoch, the business secretary, gave the FRC a new remit in November to promote economic “competitiveness”, as part of wider efforts by the government to cut red tape on businesses.
Izza said: “It all comes back to the FRC’s competition role. If you want good people to come in, if you want good firms, you’ve got to give them a profession where they feel their view is valued.”
The FRC has imposed record fines on audit firms in recent years in a bid to crack down on poor quality in the sector. This followed high-profile corporate scandals at companies where auditors fell short of required standards, such as at outsourcer Carillion, which collapsed in 2018.
In the last full financial year to March 2023, the FRC levied fines of £40.5mn for misconduct and breaches of standards, slightly below the record £46.5mn in the previous 12-month period.
Izza said that although the regulator was still waiting for the government to pass legislation to give it enhanced powers “some of the things that potentially are a barrier to competition are actually within the FRC’s control”.
He pointed to the increased level of fines in recent years and the public rebuking of individual audit partners, a practice that he said could “effectively end someone’s career”.
He added: “If there is a deficiency, and let’s say at one extreme it’s incompetence or outright deception, people should have the book thrown at them. But if the issue is one of judgment . . . you should be more forgiving of that.”
Richard Moriarty, who took over as chief executive of the FRC in October, has already signalled a more moderate approach to his predecessor Sir Jon Thompson in an effort to help the industry attract talent.
Thompson had often struck a harsher tone but Izza, who has led the ICAEW since 2006 and is set to step down at the end of March, said the FRC under his leadership deserved “a lot of credit” for the way it had “raised [its] game post-Carillion, and clearly the regime is more punitive than it was historically”.
The FRC said it had taken measures to “significantly raise audit quality standards in recent years”, adding: “We believe that this progress demonstrates the merit, balance and proportionality of our current enforcement approach, which includes addressing matters through constructive engagement as well as through investigations, in addition to our ongoing work as an improvement regulator.”
[The Financial Times]
