On 9 April 2018 the FRC published revised Sanctions Guidance for Decision Makers in relation to Audit Enforcement Procedure and Accountancy Scheme disciplinary matters. The revised Sanctions Guidance seeks to implement (at least some of) the recommendations in the report which was published in October last year by the independent Review Panel on enforcement sanctions (headed by Sir Christopher Clarke).
Executive summary
- The Revised Sanctions Guidance is very similar in many respects to the existing guidance; it seeks to promote proportionality, consistency and predictability of disciplinary decision making on sanctions.
- The practical reality however is that the Revised Guidance is unlikely to provide any greater certainty for firms and individuals who are the subject of disciplinary proceedings. In the absence of a tariff based system (which the Independent Review Panel did not favour), it would probably have been unrealistic to expect otherwise.
- The Revised Sanctions Guidance does not extend the range of sanctions that are currently available to a Decision Maker.
- The guidance contains some subtle encouragement to Decision Makers to favour an increase in the level of fines, but does not set out any ranges or level of fines which should be considered.
- The guidance revises the settlement discount regime.
- The guidance emphasises the importance of co-operating with the FRC.
- The Revised Sanctions Guidance takes effect from 1 June 2018. It would appear that the intention is that it will apply to all current cases where questions of sanction arise after 1 June 2018 and not just to those disciplinary matters that are commenced post 1 June 2018.
We note below some points of interest.
Financial penalties
The language in the Revised Guidance is in broadly the same terms as the existing guidance. Decision Makers therefore need to look at the size and financial resources e.g. the total turnover of the statutory audit firm and the effect of a financial penalty on its business. The amount of revenue generated by the firm or the business involved will continue to be a factor to be considered when assessing credible deterrence.
Like its predecessor, the Revised Guidance rather blurs the distinction between the overall revenues of the firm and the revenues that are directly attributable to the audit practice's revenue. There will, therefore, in practice continue to be arguments by firms that seek to look to the audit practice's revenues as being the relevant starting point, whereas the Executive Counsel can be expected to continue to advocate the overall revenue figure for the firm as being the correct starting point.
Although a Decision Maker is required to establish whether or not the firm has any relevant insurance, the existence of insurance is not a basis to increase the amount of a financial penalty.
Exclusion
Where a member is found to have been dishonest, the starting point is that he or she should be excluded from the ICAEW (or equivalent) for 10 years.
Precedent Value of other decisions
It remains permissible for Decision Makers to consider the outcomes of previous disciplinary matters. However, the Guidance makes clear that Decision Makers should not be constrained by this, and their views on what should be an appropriate sanction based on the facts and matters of the case before them is of paramount importance.
Emphasis on non-financial penalties
The Sanctions Guidance states expressly that there should be a focus by Decision Makers on sanctions which are likely to improve the underlying behaviour or performance and notes that there may be circumstances where the objectives can be achieved without a financial penalty. In practice we consider such an outcome is only likely to arise in cases which concern technical minor breaches of a relevant requirement without there being any significant risk of damage.
Relevance of other regulators
The Decision Makers are to have regard to the possibility of sanctions being imposed by another regulator in relation to the same breach. The Guidance does not expand on what this means in practice, but we presume the intention is that the Decision Maker should consider reducing what would otherwise be felt to be the appropriate sanction if e.g. the firm was also likely to be the subject of a significant fine by another regulator.
Mitigating and aggravating factors
The mitigating and aggravating factors on sanctions are similar to those in the existing guidance although they seek to place greater emphasis on the need for co-operation with the FRC. A Decision Maker can conclude that the failure promptly to bring the breach to the attention of the FRC should be an aggravating factor. A poor disciplinary record continues to be an aggravating factor, although the Guidance notes that the focus should be on the similarity of the previous conduct to that in the current case, the amount of time that has elapsed since the previous case and the firm's response to the previous sanction.
Co-operation with the FRC's disciplinary procedures will not be mitigating factor to be taken into account unless it is of an "exceptional level". The Guidance indicates that self-reporting and the volunteering of information and documentation would be needed. Conversely, inadequate responses to information/document requests, failure to meet FRC deadlines and inadequate preparation for FRC interviews will be taken as examples of aggravating factors of a lack of co-operation.
As a practical point we would suggest that firms think carefully about how best to document written explanations for delays in responding to the FRC's (often ambitious) requests. These reasons can then be relied on at a later date to seek to demonstrate why it would not be appropriate for them to be used as evidence of a lack of co-operation.
Settlement Discounts
The Independent Review Panel was keen to incentivise settlement and considered that a Stage 1 settlement (before formal complaint / decision) should usually warrant a 35% discount. The Revised Guidance sets-out the following potential settlement discounts:
- Stage 1 - Notice of Investigation up to 28 days after receipt of Executive Counsel's Decision Notice – 20-35% (i.e. at least a 20% discount).
- In the case of the revised guidance for the Accountancy Scheme, Stage 1 now ends 28 days after receipt of the Proposed Formal Complaint rather than the final Formal Complaint. Accordingly there is a much shorter timeframe within which to consider whether to settle and benefit from the maximum settlement discount under the Scheme.
- Stage 2 – up to 28 days after receipt of Enforcement Committee's Decision Notice – 10%-20% (i.e. at least a 10% discount).
- Stage 3 – up to 29 days prior to hearing – up to 10%.
- Stage 4 – up to 1 day prior to hearing – up to 5%.
The Panel had recommended that the link in the existing Sanctions Policy and Guidance to applying a discount only where all the heads of complaint had been admitted should be removed as there could be cases where a discount should still be permitted even though more limited admissions had been made. The Revised Sanctions Guidance for the Audit Enforcement Procedure does not set out any formal adjustment for sanctions in circumstances where partial admissions are made, but does state that the Decision Makers are permitted to make such discounts as they consider appropriate which we consider is at least a step in the right direction.
The Independent Review Panel had also suggested that the FRC and Executive Counsel should provide further examples of “co-operation” and, in an appropriate case, it thought a discount of up to 50% might be appropriate. The possibility of a 50% discount is not a feature of the Revised Guidance.
