The Financial Reporting Council (FRC) has long followed the trend amongst financial regulators for increasing scrutiny of firms' financial and professional compliance. Whilst we've noted the FRC's interest in the compliance of smaller firms in our blog, it is their efforts on a larger scale that have recently caused a stir.
In September 2013, the FRC handed out their largest ever fine of £14m to Deloitte after conducting a 6 year-long investigation into the firm's work for companies involved in MG Rover's collapse. The FRC held that Deloitte had failed in its duty to avoid conflicts of interest by providing the businessmen leading the purchase of MG Rover from BMW with corporate finance advice whilst also acting as auditor for MG Rover. The FRC's focus on Deloitte's professional duty to 'act in the public interest' introduced the idea of accountancy firms being held to a far higher standard than previously. The widely accepted position prior to the FRC decision was that accountants' duties centred on acting with integrity and in their client's interests. Unsurprisingly, the far wider responsibility imposed by the FRC was of concern for firms of all sizes.
However, a recent appeal tribunal decision has now significantly scaled back the FRC's sanctions on Deloitte, overruling 8 out of 13 findings that the FRC had made. Of particular significance was the tribunal ruling that the 'public interest' concept is "vague and unhelpful" and that the reason the FRC's fine was excessive was that the firm had not deliberately disregarded its duties. The welcome result for Deloitte was a reduction in the fine from £14m to £3m and a reversal of the three-year industry ban imposed on one of its partners.
Whilst it is encouraging that there is an effective mechanism for reigning in excessive enforcement action, this £3m fine is still a record fine from the FRC. It is more than double the amount of the next largest fine of £1.4m handed down against PwC in 2012 in respect of its audit work for JP Morgan.
The endorsement of this fine is a sign that the FRC's power and inclination to use these sanctions proactively is unlikely to wane any time soon. Although it has been confirmed that there is no general legal duty for firms to act in the public interest, firms may need to re-examine their compliance procedures in light of the increased consideration being given to whether such a duty should exist.