The Financial Reporting Council (FRC) has published a flurry of papers on its investigative powers under the Accountancy Scheme that was published on 1 July 2013.  These provide guidance on (i) factors taken into account when FRC decides whether to pursue an investigation; (ii) procedures to be followed during such investigation and (iii) its policy on publishing the existence and findings of such investigations. 

Background

The majority of disciplinary investigations against accounting firms and individual accountants are undertaken by ICAEW or other professional body.  The professional associations may also refer serious matters to FRC for investigation.  However, FRC has the right to initiate investigations itself where it chooses to do so. 

The FRC announced a series of reforms in 2012 in response to criticism of its role in disciplinary matters, particularly of a perceived lack of independence from the accountancy bodies, who had to be consulted before FRC could start an investigation or amend its procedures.  FRC was also criticised in particular for long delays in reaching decisions.

On 1 July 2013 FRC published The Accountancy Scheme, effective from the same date.  Important innovations included: a change to the definition of misconduct[1]; removal of the need to consult professional accountancy bodies; provisions aimed at reducing delays, including early resolution of disciplinary cases without the need for a tribunal hearing; a new power to issue interim orders; and the introduction of procedures allowing enquiries to be held before deciding whether investigation was needed, rather than, as previously, only once an investigation was underway.  For further information on The Accountancy Scheme, please see our Law-Now article. Three papers since then have put some flesh on the bones.

Probably of most interest, because the issue has aroused most argument, is new guidance on publication.

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[1] The new definition of misconduct reads:  ‘Misconduct means an act or omission or series of acts or omissions, by a Member or Member Firm in the course of his or its professional activities (including as a partner, member, director, consultant, agent, or employee in or of any organisation or as an individual) or otherwise, which falls significantly short of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member or the Member Firm or to the accountancy profession’.

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Publication

The Conduct Committee of the FRC must consider whether to publish the outcome of investigations, disciplinary and appeal tribunals and settlement agreements.  Also, more controversially, FRC may publicly announce its decisions relating to the commencement of investigations.

Commencement

With regard to commencement of investigations, which by definition means that the member or firm being investigated has not yet been found to have been at fault in any way, publication is not automatic: the Committee must take into account whether the investigation is likely to lead to a formal complaint and the ‘level of interest’ in the matter.

The default position, though, is that every time the Committee receives a request from an accounting body to start an investigation or decides itself to begin one, this should be published.  It will only refrain from doing so if the Committee decides that publication would be inappropriate.  FRC may even publish a decision not to investigate. 

This might not arouse much interest if anonymity were assured, but that will not always be so.  Where the purpose of an investigation is to determine whether there is evidence of misconduct, publication will include ‘sufficient information to enable the reader to understand in broad terms the matter being investigated’.  The names of individual members whose conduct is under investigation may be published, for example where it would not be possible to understand the nature of the matters under investigation without publishing the name, where the identity of the person or firm is already public knowledge, or where it could be readily inferred from the circumstances.

Outcome of Investigation

In all decisions relating to publication of the outcome of investigations, tribunal decisions or settlement agreements, there is a strong presumption that publication will be in the public interest.

Publication will only be withheld or delayed if the Committee considers that other public interest factors outweigh the publication presumption.  Clearly, this will happen only on rare occasions.

Form of Publication

Members or Member Firms need be given no more than 24 hours notice of the publication naming them.  Publication will be by press release and website announcement, supplemented by an announcement to the stock exchange where a public company is involved.

Those hoping that news of an investigation may be a one day wonder are likely to be disappointed.  Decisions and reports that are published will remain on the FRC website for a minimum of 5 years.

Factors

The FRC may investigate whenever its Conduct Committee decides that the matter appears to ‘give rise to serious public concern’ or may damage ‘public confidence in the accounting profession in the UK’. 

The ‘nature, extent, scale and gravity’ of alleged misconduct are all to be taken into account.  The Committee will consider whether the alleged misconduct adversely affected a significant number of people in the UK and whether it involved the loss or potential loss of significant sums of money. £10m is mentioned as a trigger figure. 

The Committee understandably believes that such factors are more likely to occur where a publicly traded company, a major audit firm, a significant financial institution, a utilities supplier or a large UK charity is concerned.

There are no surprises here, but the Guidance provides a reminder of how widely FRC may cast its net.

The Accountancy Regulations

The FRC Accountancy Regulations set out the rules under the Accountancy Scheme that will apply to all investigations.

The Regulations add flesh to the Accounting Scheme in its provisions relating to pre-hearing directions, open hearings, the conduct of disciplinary proceedings and appeals, and other related matters.

Pre-hearing directions may cover a wide range of matters including disclosure, the use of expert evidence and whether or not the public is to be excluded.  Oral argument will not ordinarily be heard before pre-hearing directions are given.

The presumption is that Tribunal hearings will be in public, but the Tribunal may exclude the public from all or part of a hearing if in its opinion publicity would prejudice the interests of justice.

With regard to the conduct of proceedings, the Accounting Rules give short shrift to any attempt to rely on technical faults in proceedings or documentation.  Provided proceedings are in accordance with natural justice, formal technical requirements will not be allowed to disrupt an investigation.

The rules also specify the timeline for submission of documents and the order of play in Tribunal hearings, as well as stipulating that insofar as it does not form part of the findings published by FRC, formation which comes to the knowledge of those involved with the disciplinary procedure should be treated as confidential (with a number of predictable caveats).

Much of the publication deals with administrative matters such as the giving of notice and the remuneration of those serving on tribunals. There is also a section on setting budgets for each investigation.

Any member or accountancy firm must provide the FCA Executive Counsel with whatever information he requests, not only during the course of an investigation but also now for the purposes of a preliminary enquiry prior to the Executive Counsel recommending whether a full investigation is appropriate or not.  This obligation applies to all former members also.

Conclusion

Documents released in recent weeks provide useful information as to how FRC sees its investigative role and the mechanics of tribunals and other hearings.  FRC may now without consultation enquire into and investigate potential misconduct – very widely defined – in any significant case where it detects public interest.

Practitioners may be concerned at the confirmation that publication, including names, is possible even at the stage of initial enquiry.