What to do if you’re being investigated by the FRC for misconduct
24 Aug 2022
For accountants, the prospect of being investigated for misconduct by the Financial Reporting Council (FRC) can be extremely daunting.
FRC investigations demand attention and resources. They can last for years even before reaching any disciplinary tribunal stage. Sanctions, for anyone found guilty, can be extremely serious: even career-ending.
What does the FRC investigate?
The FRC’s remit is to serve the public interest by setting high standards of corporate governance, reporting and audit – and ensure that finance professionals adhere to these.
One way the agency does this is by investigating allegations of misconduct against practising (and non-practising) chartered accountants, including those who are members of the ICAEW, CIMA and ACCA.
Each of these bodies has their own set of professional standards to which members must adhere. Any alleged failure to do this can lead to the individual being investigated for misconduct by that body.
However, in cases where the allegations are considered to affect the public interest (for example in relation to the collapse of a publicly listed company) the FRC may also decide to investigate.
The FRC has three distinct ‘schemes’ by which it investigates any alleged misconduct: one for accountants, one for auditors and one for actuaries. It also has various policies which supplement the schemes.
The decision to start an investigation into an individual Member is made by the FRC’s Conduct Committee. To make this decision the Conduct Committee must:
a) have reasonable grounds to suspect that there may have been misconduct, and:
b) consider that the case raises important issues affecting the public interest.
An FRC investigation may start in a number of ways. It may stem from a disclosure made to the agency; or as a result of a publicly listed company going into administration or having made an announcement to the market casting doubt on financial reporting; or by a criminal or regulatory investigation undertaken by another agency such as the FCA or the SFO.
Where another agency is involved it is likely there will be an exchange of information between the two under the terms of a memorandum of understanding.
FRC investigations are overseen by the agency’s Executive Counsel. However, in practice they are usually conducted by an in-house team of lawyers, investigators and accountants who may seek support from external experts.
How will I be informed that the FRC is investigating me?
Once the FRC’s Conduct Committee decides to refer a matter for investigation, it will write to the Member concerned to inform them of this.
This ‘notice of investigation’ will inform the Member of the fact that they are to be investigated for misconduct by Executive Counsel. It will also provide a high-level summary of the scope of the investigation (for example explaining which sets of accounts are under scrutiny), and will remind the member of their obligation to cooperate.
In many cases the FRC Executive Counsel investigation team will offer the Member a scoping meeting. This is an opportunity to find out more about the matters under investigation, how long the process might take and to raise any preliminary issues such as access to documents.
Will the fact that I am under FRC investigation be made public?
The FRC may make a public announcement that it has started an investigation into an individual. If it does, this will be posted on the FRC’s website shortly after the Member receives notice of the investigation.
Such a public announcement may – or may not – name the Member under investigation. However, even if not named, their identity may be apparent from other facts in the announcement or the context of the investigation.
The decision whether to publicise an FRC investigation is made by the FRC’s Conduct Committee. Depending on the circumstances, it may be possible to challenge the decision to publicise or the wording of the notice.
How does the FRC’s investigation process work?
The Investigative Stage
The FRC’s investigative stage is overseen by its Executive Counsel. The investigation team will review relevant contemporaneous material, conduct interviews, and gather information about the underlying facts from other sources including from other agencies who are investigating the matter.
It may instruct external accounting and legal experts to provide an opinion and advise on the case.
Anyone under investigation by the FRC will be asked to attend an interview. This is a very important element of the investigative stage as it is an opportunity for the individual to hear the FRC’s concerns, and to put forward their explanation.
Anyone under investigation by the FRC will want to carry out thorough and thoughtful preparation for interview, in advance of which the FRC will have disclosed some of the relevant material.
If, at the conclusion of its investigation, Executive Counsel considers there is a realistic prospect that a Disciplinary Tribunal will make an adverse finding (and also that such a hearing would be in the public interest) then it will deliver a Proposed Formal Complaint (PFC) to the member.
The Representation Stage
The Proposed Formal Complain (PFC) document summarises the alleged misconduct uncovered by the Executive Counsel.
Once the PFC has been delivered to the member concerned, they have an opportunity to make representations. While not required, representations may cause Executive Counsel to think again about the allegations of misconduct.
If, having considered any representations, the Executive Counsel remains of the view that an adverse finding will be made and a Disciplinary Tribunal is in the public interest, then a Formal Complaint against the Member will be delivered and the matter will proceed to Tribunal.
Is it possible to settle an FRC investigation?
It is usually possible to resolve an FRC investigation by way of a settlement. The Executive Counsel may enter into settlement discussions at any stage after the commencement of an investigation prior to any final determination of the Formal Complaint.
In order to agree a settlement a Member must make admissions as to their misconduct. These will result in some form of penalty and/or disciplinary sanctions being imposed.
Choosing whether, and when, to settle an FRC matter is an extremely delicate decision. An action taken to advance an individual’s case in respect of one aspect of an FRC investigation may weaken the case for settlement, and vice-versa.
How long does an FRC investigation take?
FRC investigations can take a long time. Recent experience shows that the initial investigatory phase of an FRC investigation will often run for 18 months or more before any decision to issue a PFC is taken. The FRC’s internal guideline is to complete the investigation within two years but sometimes investigations will take longer than this.
If disciplinary proceedings before a tribunal follow, then it can take another year or longer for the hearing to take place.
The subject of an investigation has very little control over the timescale of an FRC investigation.
What are the possible punishments for anyone found in breach of FRC misconduct rules?
Anyone who admits or is found to have committed misconduct is liable to sanctions. These normally include a financial penalty (made up of a combination of a fine and payment of some or all of the FRC’s legal costs) and some action related to membership of the person’s professional body. This can range from a reprimand to permanent exclusion.
The FRC determines sanctions based on an assessment of the nature and seriousness of the misconduct, with consideration given to a range of factors including any financial benefit; the gravity and duration of the misconduct; lack of integrity and whether it is isolated or repeated misconduct.
The sanctions/combinations of sanctions are decided first in principle, with consideration then given to any relevant aggravating or mitigating circumstances. Consideration is also given to whether a discount should be applied for admissions or settlement.
How can Hickman & Rose help in FRC Investigation matters?
Being the subject of an FRC investigation can be a difficult and stressful experience which can last for many months, or even years.
Hickman & Rose has great experience advising individuals through this process, often acting for senior finance executives when financial reporting at their company is under scrutiny. The team has expertise in dealing with the technical legal and accounting issues that arise in these cases, and in the process and practicalities of dealing with the FRC which helps secure clients the best possible outcome.