Key themes from 2024:

• The ‘drumbeat of regulatory enforcement’ which we noted in our review of the FRC’s activity in 2023 continues, with a number of investigations resulting in sanctions.
• An FRC-commissioned report highlights barriers to "entry and growth" faced by UK audit firms.
• The threats and opportunities of AI are being looked at by the FRC, but 2024 was a quiet year, with anticipated guidance still to be published.
• The FRC's headcount remains steady.
• A lack of competition for the Big 6 continues to reflect the PIE audit market. While the number of FTSE 350 audits being performed by non Big-Four firms has increased, respondents to FRC reviews from challenger firms highlight continuing barriers to entry.
• It looks as though we may finally see the advent of ARGA under the Audit Reform and Corporate Governance Bill which is working its way through Parliament following its inclusion in the Kings Speech in July 2024.

The key events in 2024

FRC announce New Corporate Governance Code

On 22 January, the FRC published a revised version of the UK Corporate Governance Code. Coming into force for financial periods beginning on or after 1 January 2025, the 2024 Code applies to companies listed in the commercial companies category or the closed-ended investment funds category, regardless of where they are incorporated. Of particular interest to auditors is that boards are now to make a declaration in relation to the effectiveness of their material internal controls. 

FRC publish review of reporting by the UK’s largest private companies

On the last day of January the FRC published a Thematic Review on the standard of reporting made by the UK’s largest private companies. This is of particular interest to the audit profession (and its insurers) given the number of large private company audits now subject to FRC investigation, and the potential change to the definition of 'Public Interest Entity' when (if?) the transition to ARGA takes place. The review found that the quality of reporting was mixed, particularly in relation to how clearly companies explained material matters that were complex or involved an element of judgment.

FRC publish report into barriers to entry and growth faced by UK audit firms

To bolster the FRC’s strategic objective to create a more resilient audit market through greater competition and choice, on 1 February, the FRC commissioned a report on the barriers to entry and growth. The resulting report noted that the key challenges facing smaller firms were capacity constraints and, related to that, recruitment and retention challenges. There was widespread concern amongst the firms who responded that the capacity shortage was being driven by the general unattractiveness of the profession and the increasing burden of regulation on smaller firms.

Sanctions announced / M&C Saatchi plc

On 4 March the FRC published its final decision notice concerning the audit of M&C Saatchi plc ("M&C").

The FRC imposed a financial sanction of £2,250,000 (discounted to £1,462,500 for early admission and disposal), against the firm and £75,000 (discounted to £48,750 for early admission and disposal) against the audit partner. Both parties also received a severe reprimand.

FRC launches market study on UK sustainability assurance market

More and more businesses are producing information on their social, economic and environmental performance (sustainability information) to respond to user needs and to meet regulatory requirements.

On 21 March the FRC launched its first market study on the UK sustainability assurance market. As the FRC noted, the market for providing independent assurance over the sustainability information disclosed by UK companies has expanded rapidly with 60% of FTSE companies obtaining some level of assurance in 2020, rising to 84% in 2024. As sustainability concerns continue to draw focus, we expect this figure will only increase, necessitating increased scrutiny of this emerging market.

The market study is expected to conclude in the early part of 2025. It remains to be seen what degree of rigour that can reasonably be expected of reporting in what is a developing, and politicised field.

FRC welcomes Government’s plans to legislate following Non-Financial Reporting Review

On 18 March 2024 the previous Conservative government announced a package of reforms which aimed to, amongst other things, simplify both the financial and non-financial reporting requirements of small and medium-sized enterprises ("SMEs"). On 22 March the FRC published a press release welcoming these plans.

FRC publishes plan and budget for 2024-25

The FRC’s annual plan and budget was published on 25 March. Amongst the information included in the report was news that, despite cross-party support, the FRC was not expected to receive additional statutory powers in the coming year. The FRC’s budget (combined with that of the UK Endorsement Board) grew from £66.3m to £71.5m, an increase 5% lower than anticipated. In light of these key points the FRC announced that it have decided not to go ahead with a planned 16% increase to its headcount.

FRC revises UK and Ireland accounting standards

Just two days after announcing its plan and budget for the coming year, the FRC issued its 2024 Periodic Review which revised aspects of its UK and Ireland accounting standards. The FRC has sought to make a number of improvements, predominantly to FRS 102, aimed at making the accounting standards easier to prepare, and apply consistently.

28 March 2024 - UK and Australia audit authorities sign mutual recognition agreement

To cap off a busy Q1 for the FRC, it was announced that the FRC and the Australian Securities and Investment Commission had agreed a Memorandum of Understanding on Reciprocal Arrangements making it easier for auditors to work between both countries. We query whether relying on overseas recruitment is a long-term solution, but meanwhile this is a positive side-effect of increasingly aligned accounting standards globally.

Sanctions in respect of a local authority pension fund

At the start of spring 2024, the FRC published the second of what would be a string of sanctions and decision notices against audit/accountancy firms. The firm was issued with a penalty of £50,000 (adjusted by a discount of 20% for co-operation to £40,000).

Sanctions / London Capital & Finance plc

Three audit firms – one small, and two from the Big 4 – audited the 2015-2017 financial statements of London Capital & Finance plc (“LCF”). In December 2018, the Financial Conduct Authority imposed restrictions on LCF's ability to issue or approve further financial promotions. LCF went into administration on 30 January 2019, owing about £237m to 11,625 individual bondholders.

For their admitted breaches the FRC imposed a headline sanction of £60,000 on the smaller firm and £7,000,000 apiece for the Big 4 auditors (all fines discounted by 30% for admissions and early disposal). This illustrates the FRC's proportionate approach to fines, based upon audit firm revenue.

Publication of Final Settlement Decision Notices / Carillion Plc

Following its previous announcement on 12 October 2023 where the FRC provided a summary of its decisions pertaining to the collapse of Carillion plc, it has now published, in full, its two Final Settlement and Decision Notices. Between them, the two documents span over 500 pages and are the latest in a long line of decisions stemming the collapse of Carillion plc.

Sanctions / Aseana Properties Limited

On 14 May 2024, the FRC investigated the audit of the 2019 financial statements of Aseana Properties Limited, a Jersey entity. Pursuant to the Crown Dependencies Recognised Auditor Sanctions Procedure, the FRC Enforcement Committee found failures and imposed a sanction and financial penalty of £180,000 (which was adjusted by a discount of 20% to £144,000, for co-operation and steps taken to ensure non-repetition).

Sanctions / MRG Finance UK PLC

The FRC announced on 9 July that its Executive Counsel had issued a Final Settlement and Decision Notice in respect of the statutory audit of 2018 and 2019 financial statements of MRG Finance UK PLC. The firm was issued with a financial sanction of £200,000 (discounted to £120,250 for mitigation, admission and early disposal), as well as an order requiring specified actions to avoid re-occurrence.

Sanction against Sushovan Hussain in relation to Autonomy Corporation Plc

On 11 July it was announced that sanctions were imposed on the Chief Financial Officer of Autonomy Corporation plc, Mr Sushovan Hussain. On 30 April 2018 Mr Hussain was convicted by a jury in California of 16 charges which included conspiracy to commit wire fraud, wire fraud and securities fraud. For this he was ordered to pay financial penalties of approximately US$10 million. While the same facts were being investigated by the FRC.

it was decided that it would not be in the public interest for the Disciplinary Tribunal to also decide upon them but Mr Hussain was excluded from the ICAEW for 14 years, and was ordered to pay the Executive Counsel's costs of £450,000.

FRC welcomes government legislation – the Audit Reform and Corporate Governance Bill

Following their election success on 4 July 2024, Labour wasted little time in setting out the priorities of its new government. Amongst the new government's planned legislation was the draft Audit Reform and Corporate Governance Bill. In its press release made on the same day as the King's Speech, the FRC said that it welcomed the draft legislation and would work with the Department of Business and Trade as the Bill progresses. It finally looks as though we will witness the creation of ARGA through legislation.

FRC publishes latest Annual Enforcement Review

The FRC published its Annual Enforcement Review on 25 July, its sixth overall. At a glance, the Review shows that the FRC had, at the time of writing, 35 active investigations, with six investigations being opened during the course of the year. Conversely, 22 cases were concluded: 13 of which were resolved through constructive engagement; 8 were resolved through settlement; and one was closed without further action. Given the number of audits which take place each year, it is worth reflecting on how few proportionately proceed to an FRC Tribunal hearing.

FRC publishes annual Tier 1 audit firm inspection results

To round off July, the FRC published its Annual Review of Audit Quality. Of the audits inspected during the year, 74% were categorised as good or requiring limited improvements. It was also note that there had been a trend of general improvement over the last 5 years from the largest four firms (Deloitte 94%, EY 76%, KPMG 89% and PwC 76%). Audit quality for the FTSE 350 has also improved, up from 81% to 87% year on year.

FRC publishes Annual Review of Corporate Reporting

On 24 September, the FRC published its Annual Review of Corporate Reporting setting out the findings of its monitoring of UK companies’ annual reports and accounts alongside its expectations for the upcoming reporting season.

Overall, the FRC reported that it was pleased that the quality of reporting in the FTSE 350 has been maintained, and that there had been improvements in several reporting areas, with provisions and contingencies falling out of the ‘top ten’ issues for the first time in over five years. The FRC also questioned significantly fewer companies in relation to their disclosure of judgements and estimates, another area that has featured in the top ten for many years.

That said, the FRC reported that it was disappointed that there has been an increase in the number of restatements in relation to the impairment of assets and cash flow statements, predominantly in companies outside the FTSE 350, where there was evidence of a widening gap in quality. 

FRC publishes key accountancy and audit facts and trends report for 2024

In the 22^nd edition of its report on key accountancy and audit facts and trends, the FRC noted a continued growth in the accountancy profession, with membership increasing both in the UK and worldwide. Meanwhile, after a decline in previous years, the student numbers showed signs of stabilising., with a minimal 0.2% decrease in the UK and Republic of Ireland and a slight 0.1% increase worldwide.

FRC publishes Annual Review of Corporate Governance Reporting

On 26 November the FRC published its Annual Review of Corporate Governance Reporting. The review emphasises the continued importance of the Code's 'comply or explain' approach, which allows companies to depart from provisions when circumstances warrant, provided that companies offer high-quality explanations for their alternative approach. The quality of such explanations was, in the FRC's view, an area for improvement.

FRC published its annual Audit Market and Competition Update

The report shows that the Big Four audit firms continue to dominate the market, although challenger audit firms’ share of FTSE350 audit engagements grew to 13% in 2023 (41 audits up from 35 in 2022). The total audit fees earned by firms in the Public Interest Entity market continued to increase, reaching £1.4 billion in 2023 with growth across multiple firms.

Sanctions / Akazoo Limited

In a final enforcement decision of 2024, the FRC announced sanctions in respect of the audit of the financial statements of Akazoo for its financial years 2016 – 2018.

The respondents made extensive admissions in respect of each of the three audit years, with the firm facing a financial sanction of £650,000 reduced from £1,000,000 to take account of a separate penalty imposed by the US Securities and Exchange Commission and further discounted for admissions and early disposal by 30% to £455,000. 

Significantly, the FRC also imposed a non-financial sanction requiring the firm to conduct a root cause analysis into the breaches and to identify and assess measures taken since to prevent reoccurrence. We respectfully suggest such non-financial sanctions are an effective alternative to large fines, and are to be welcomed.

FRC publishes draft Strategy 2025-28

Finally in 2024, the FRC published its draft strategy for the next three years, restating that the purpose of the FRC is the 'serve the public interest and support UK economic growth by upholding high standards of corporate governance, corporate reporting, audit and actuarial work'. That purpose is, in part, to be achieved through the FRC's 'four faces' of: system partner, supervisor, facilitator, and enforcer.