Comment
The FCA is watching: The regulator is expecting full disclosure from audit firms or expect financial penalties – Credit: Macedo Media
For the lovers of Latin and political philosophy, the phrase ‘Quis custodiet ipsos custodes?’ or in plain English ‘who guards the guards’ by the Roman poet Juvenal has precipitated much thought and debate over the decades. Indeed, who ensures the police, army and more lately, statutory auditors are held accountable?
In August 2024, where external auditors are concerned, all became clear – the Financial Conduct Authority (FCA). Well, partly. In truth, the Financial Reporting Council (FRC) ensures the auditors play by the rules but two recent events involving MacIntyre Hudson (MHA) and PwC shows the FCA will take a more proactive approach to oversight.
The FCA publicly criticised MHA for failing to notify the regulator of client money (CASS) breaches at several financial services clients it acted for. Similarly, PwC was fined £15m for failing to inform the FCA about its suspicions of fraud at LCF. The latter was unique as this was the first time the FCA has fined an accountancy firm for breaching FSMA 2002.
From a regulatory perspective, there was an air of inevitability over the sanctions. The FCA expects auditors to act as its eyes and ears on the ground and report applicable matters to them. Failure to report relevant matters which the FCA should have known about will irk the regulator.
Nevertheless, there has always been an element of judgement when it comes to disclosure. For example, some would argue MHA’s failure to disclose that a client had co-mingled funds was reckless as this is strictly forbidden under CASS rules. Others may disagree. If the audit client remedied the breach during the audit there may be nothing to report.
In future, auditors may have to err on the side of caution and provide the FCA with detailed client money reports detailing all of their findings. As for notifying the regulator about fraud incidents, the materiality threshold for reporting fraudulent matters may have to be drastically reduced or removed so all matters however insignificant are escalated.
