On 11 May 2021 the FRC sanctioned Haysmacintyre LLP ("Haysmacintyre"), a UK accounting firm, and its Head of Audit & Assurance, David Cox ("Mr Cox"), for "pervasive failures" relating to their audit of Associated British Engineering ("ABE").
The FRC found that the Audit "failed in its principal objective: that of providing reasonable assurance that the FY2018 financial statements were free from material misstatement."
The Final Decision Notice can be found here.
The findings of FRC
Haysmacintyre audited ABE's financial statements for the financial year ending March 2018 ("FY2018").
As auditor, Haysmacintyre had a statutory duty to form an opinion as to whether the financial statements showed a true and fair view and had been properly prepared in accordance with the International Financial Reporting Standards and the Companies Act 2006.
Concluding that there had been "multiple, serious failures", the FRC found that there had been a failure to exercise sufficient professional skepticism and reasonable professional judgement and to obtain sufficient and appropriate audit evidence to provide a reasonable basis for the auditor's opinion.
In two other areas (journal entry testing and defined benefit pension scheme) the FRC identified a failure to conduct the audit in a way sufficient to obtain appropriate audit evidence in accordance with ISA 500.
The FRC said that the breaches admitted were "pervasive, extensive and, in relation to the audit of the inventory, serious". No evidence of misstatement or dishonesty was identified.
Sanctions
A financial penalty of £125,000 was imposed on Haysmacintyre, reduced by 15% to reflect mitigating factors (described below), and by a further 35% for early disposal. The total amount to be paid by Haysmacintyre was therefore £70,000.
Applying the same formula to Mr Cox, the FRC imposed a financial penalty of £17,500 which it reduced to £10,000. Both Haysmacintyre and Mr Cox were required to pay the FRC's costs of £43,924.
The FRC also decided to publish a statement in respect of both Haysmacintyre and Mr Cox as a form of "severe reprimand" to them.
The level of penalties took account of the fact that the breaches related only to one audit year and had not been found to have had an adverse (or potentially adverse) effect on a significant number of people or to have led to the financial statements being misstated. Nonetheless, the FRC considered the breaches could have harmed investor, market and public confidence in the truth and fairness of the financial statements published by auditors, and in the standards of their conduct generally.
The FRC also had regard to the fact that Haysmacintyre:
had conducted a "full and frank Root Cause Analysis" in relation to the breaches and self-reported to the FRC;
had committed itself to a programme of remedial measures for the improvement of audit quality which was being reviewed by the FRC;
had provided an "exceptional" level of co-operation during the FRC's investigation; and
had made full admissions of breaches at Stage 1 (the earliest possible stage) in the investigation.
Comment
This finding against Haysmacintyre, in 2019 the tenth largest auditing firm in the UK, highlights the increased scrutiny being applied to audit work and a corresponding uptick in risk associated with getting it wrong.
From a practical perspective, the significant reductions applied by the FRC (to reflect the exceptional level of co-operation and early actions taken to impose remedial measures) underscore the value of properly managing and responding to an FRC investigation and seeking prompt advice as soon as you become aware of regulatory intervention.
Brodies is well placed to assist corporates and individuals on regulatory compliance in the financial services field. For more information, please contact Paul Marshall or James Millward or your usual Brodies contact.
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