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Publication
Keeping your dawn raid guidance current
Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
United Kingdom | Publication | September 2024
Following on from the UK Financial Reporting Council (FRC) publishing its plan and budget for 2024-25 earlier this year (see our briefing here), the King’s Speech in July signalled that the long-awaited transition of the FRC to a new Audit, Reporting and Governance Authority (ARGA) could now be firmly on the horizon.
In an effort to strengthen audit and corporate governance, the new Labour government has set out its intention to revamp the regulator via the ‘Audit Reform and Corporate Governance Bill’. The draft bill envisions that ARGA would:
In the meantime, on 25 July 2024, the FRC published its 2024 Annual Enforcement Review (the Review), which provides an overview of its investigations and enforcement activity in 2023/24. In addition to setting out specific examples of FRC investigations, the Review details key themes and trends in the FRC’s enforcement activities, highlighting a number of areas that should be on the radar for professional services firms. Corporates should also be aware of these themes that they will likely see from their audit firms or auditors. In this briefing we take a look at some of the key insights from the Review.
Overall, the FRC Case Assessment team opened 40 cases in 2023/24 (85% of which were audit related), a significant decline from 70 in the previous year; this decrease was attributed to fewer internal referrals from other FRC teams to the Case Assessment team.
In relation to investigations, the FRC Conduct Committee opened six new investigations in 2023/24, taking the total number of open investigations to 35 as of 31 March 2024 (28 of which relate to audit). As an alternative to investigations, the Review also sets out the FRC’s continued focus on utilising ‘Constructive Engagement’ to resolve cases, which the FRC considers appropriate for less serious cases where there is less likely to have been harm or risk of harm to the public (such as in the case of technical breaches).
In terms of enforcement outcomes, the FRC reports it concluded nine cases in 2023/24, with two major outcomes reached in long-running cases on audit failings relating to Carillion plc and London Capital & Finance plc. The FRC also appears to be meeting its self-imposed targets for concluding investigations. In respect of the FRC’s key performance indicators (KPIs) for timeliness (i.e. the period between commencement of an investigation and it being concluded, settled or closed), 53% of cases met the two-year KPI (exceeding the 50% target) and 88% met the three-year KPI (again, exceeding the 80% target).
The Review also covers the significant penalties imposed by the FRC in 2023/24 with the data suggesting that the FRC, like the FCA, may be targeting fewer, more impactful cases. While the total number of cases in which penalties were imposed has fallen for the second consecutive year (down to 8 concluded cases), the 2023/24 total of all financial penalties before any settlement discounts still reached a record high of £48.2 million due principally to the fine in the Carillion investigation, which accounts for £30.6 million of that total, becoming the FRC’s highest ever financial penalty. Similarly, the number of non-financial penalties (e.g. severe reprimands and exclusions) also fell in 2023/24, reflecting the overall lower number of cases concluded.
Unusually, the FRC had no cases which were concluded through referral to the independent tribunal in 2023/24, i.e. where breaches or allegations of misconduct determined by the FRC are not accepted, such that an independent tribunal conducts a full public hearing to make its own determination.
Finally, the FRC emphasises that proportionality is embedded in its enforcement approach, reporting that its filtering process (whereby an FRC Case Examiner conducts a first review of a case) resulted in fewer than 23% of cases reviewed by Case Examiners ultimately being referred to the Conduct Committee for potential investigation in 2023/24.
The Review identifies several key themes from the FRC’s 2023/24 enforcement activity, including:
The FRC also identifies various other recurring themes in their current investigations, including objectivity and integrity, audit planning, revenue recognition, disclosures and risk of fraud.
In relation to future enforcement, professional services firms should continue to take into account the key themes set out above and lessons learned from the FRC outcomes (and also recent FCA enforcement activity) with a view to avoiding such failings in future. Particular care will be needed in giving guidance to audit teams on recognising and reacting appropriately to potential ‘red flags’ in the course of an audit process. Audit partners may need to make difficult judgment calls and will require support from their legal and compliance advisers. Additionally, with the forthcoming transition to the ARGA, firms should be mindful that the scope of enforcement is expected to expand, potentially bringing company directors into ambit where there are serious failures in relation to their financial reporting and audit responsibilities.
With thanks to Alexander Roper for his work on this briefing.
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Unannounced inspections or ‘dawn raids’ are used by antitrust authorities to obtain evidence when there are suspicions that individuals or businesses have infringed the antitrust rules.
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The EU Foreign Subsidies Regulation, or FSR, is intended to prevent or remedy distortions of the EU internal market caused by “foreign” – meaning non-EU – subsidies benefitting companies active in the EU.
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The English High Court has given its judgment in the legal battle between FW Aviation (FWA) and VietJet Aviation Joint Stock Company (VietJet). This case revolved around the enforcement of leasing agreements for four Airbus aircraft and the alleged interference by VietJet in the aircraft’s repossession in Vietnam.
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