Financial Reporting Council Annual Enforcement Review 2025

On Thursday, 24 July 2025, the Financial Reporting Council (“FRC”) published its Annual Enforcement Review (“the Review”) for the year to 31 March 2025, following on from its Annual Review of Audit Quality published on 15 July 2025.

Headline points:

• While there is a continued reduction in the number of open investigations since 2021, the number of investigations opened is consistent with the previous year. The great majority of investigations opened have been publicly announced.
• The information gathered and relied on in investigations continues primarily to be the audit files, communications and interview evidence but the FRC is seeing an evolution in the nature of communications evidence as firms rely on a wider variety of digital platforms used by audit teams. These are providing a “rich seam” of evidence, giving real insight into how audits have been planned, monitored and reviewed, which information has not been captured on the audit file.    
• The FRC is looking to make itself fit for the future, focused on discharging its purpose against events of major global significance over recent years resulting in ongoing volatility: to ensure that the FRC’s processes continue to be efficient, effective and proportionate, with an appropriately balanced approach to risk, it has launched its End-to-End Enforcement Process Review (E2E), covering the work of its Supervision, Enforcement and Legal Services teams, and aligned with a separate project addressing Future Audit Supervision Strategy. The FRC will formally consult on E2E later in the year, including its approach to mandatory publications, governance structures, and decision-making processes to ensure continued efficiency, effectiveness and proportionality including in the context of the ability to deliver improvements in timeliness while meeting regulatory objectives. The FRC’s Executive Counsel, Elizabeth Barrett, is leaving her role in the autumn of this year.
• The full Review can be found here and the Annual Review of Audit Quality here. 

The Key Statistics

• Case Assessment opened 40 matters in the year, the same as in the previous year (which was itself a significant drop from 70 matters opened in the year to 31 March 2023)
• 8 investigations were opened by the Conduct Committee (a slight increase on the previous year). 7 were audit investigations under the Audit Enforcement Procedure (“AEP”), and 1 was an investigation into accountants under the Accountancy Scheme. No investigations into actuaries were opened during the year.
• 12 matters were resolved through Constructive Engagement, which is broadly consistent with the prior year.
• 2 investigations were closed with no further action.
• 9 investigations were resolved through settlement.
• There has been a continued reduction in the overall number of open investigations from a high of 52 in 2021 to 32.
• The FRC imposed financial sanctions of £14.5m before discount – although the FRC cautions against any trend analysis in the relation to that given “the distortive effect of subject specific circumstances or exceptional cases sanctioned in any one year.” Sanctions of £48.2 million (before settlement discount) were imposed the previous year.
• Non-financial sanctions fell in the year, reflecting the fact “such sanctions are imposed when, where and to the extent necessary.”   The flexibility of the FRC’s approach to non-financial sanctions is, we think, a positive development.  In recent years, it has at times felt as if the FRC considered it necessary to impose a non-financial sanction for the sake of it when, in reality, by the time that a matter had reached its conclusion, the firm in question may already have made significant improvements to its audit methodology and processes, as a consequence of a more general program of improvements to audit quality, and as such there was no obvious non-financial sanction that would realistically make a difference.
• Recurring themes in concluded audit investigations: lack of scepticism, compliance with ethical requirements, failure to understand the business, laws and regulations, presentation and disclosure, going concern and insufficient audit evidence.

New investigations opened

Unusually, none of the 7 audit investigations followed referrals to the Case Examiner from the FRC’s AQR team. The FRC concludes that this reflects the increased use of Constructive Engagement for some of the less serious issues identified in the AQR inspection process.

Not all investigations are announced at the outset: announcement rests in the judgment of the Conduct Committee applying the FRC’s publication policy.  5 of the AEP investigations opened in the year were announced, and one investigation under the Accountancy Scheme, that is to say 6 out of the 8 new investigations opened.  That is a significant increase, proportionately, from the previous year but it is hard to read anything into that: much turns on the specific circumstances of the case and the population of cases is relatively small.  As we noted in our equivalent article last year, the low proportion of new investigations publicly announced was a significant change from the year ended 31 March 2023 when all of the new investigations had been publicly announced.  

Cases concluded in the year

A total of 11 cases were concluded in the year. For the fourth consecutive year, concluded cases exceeded the number opened in the same period, with a resultant decrease in the number of investigations.  Of those 11 cases, 3 were opened in, or before, 2019/20, that is to say they had been open for 5 years or more.

Case Assessment

The number of cases opened by the Case Assessment team was 40 in the year, equal to those opened in the previous year. 1 came from an external referral, 3 from complaints, 16 from teams within the FRC, and 20 from the FRC’s horizon scanning.

Most cases opened were audit-related (90%, against 85% the previous year). Lower numbers of cases concerning accountants in business reflect the higher threshold for opening investigations under the Schemes than under the AEP.

44 cases were closed by Case Assessment during the year, a 27% reduction on the previous year (60).  The FRC says that the main reason for the lower number of cases closed is the reduced number of cases opened, and a further factor is the number of cases held open at the end of the year (carried over to the next year) and subsequently closed in the following year.  Of the cases closed, 9 were referred by the Conduct Committee to Executive Counsel for investigation, and 7 were transferred to the Supervisor team to resolve through Constructive Engagement. A total of 28 resulted in no further action.

The KPI for referral of a matter from Case Assessment to the Conduct Committee is 6 months. That KPI was met in only 55% of matters compared to 83% the previous year.

Constructive Engagement

The FRC’s focus on the use of Constructive Engagement as an alternative to investigation has continued. 15 Constructive Engagement cases were brought forward at 1 April 2024, 7 were transferred for Constructive Engagement in the year, 12 were concluded and 10 were ongoing as at 31 March 2025.

Of the 12 cases concluded, 75% involved one of the six Tier 1 firms, two involved a Tier 2 firm, and one involved a Tier 3 firm.

Against a KPI of 12 months to conclude Constructive Engagement, the FRC met that target in only 17% of cases, down on 38% in the previous year. That detracts significantly from the hoped-for advantages of Constructive Engagement in the form of timely intervention and swift resolution, and reflects our own experience, and anecdotal evidence that the Constructive Engagement process has become more process driven and inflexible, and lengthier. The FRC does not explain the decrease, other than to say that a number of Constructive Engagement cases were kept open until the remedial actions had been sufficiently embedded or quality improvements had been sufficiently demonstrated by firms.

Sanctions

Sanctions were imposed in 9 concluded cases, all of which were resolved by way of settlement.

The level of discount ranged from 22% to 45%, reflecting differences in the timing of admissions made and the extent of mitigation, including co-operation.

Severe Reprimands were imposed on all audit firms and engagement partners, save for one case where a Reprimand was imposed on the firm reflecting what the FRC describes as the relatively contained nature of the breach.

Of the £14.5 million financial sanctions imposed, £14.1 million was imposed on audit firms in respect of 6 audit cases.

Total financial sanctions imposed on audit partners were £0.4million (£0.3 million after settlement discounts and/or mitigation).

Non-financial sanctions form a key role in the enforcement toolkit, and are imposed where deemed necessary rather than as a matter of course. While the overall number of such sanctions imposed fell in the year, the number of conditions/requirements increased notwithstanding the lower number of cases concluded. The FRC says that this reflects its focus on forward-looking sanctions which are carefully tailored to the breaches identified.

Timeliness

The timeliness of its investigative and enforcement action remains an important KPI.

For 2024/2025, the FRC has significantly exceeded its KPIs:

• KPI: Meeting the two-year KPI from commencement of the investigation to service of an investigation report in 50% of cases – achieved this in 90% of applicable cases.
• KPI: Meeting a three-year KPI from commencement of the investigation to service of an investigation report in 80% of cases – achieved this in 87% of cases.

In our experience, it remains the case that investigations can, and often do, take on average three years to conclude. The enforcement team has reduced this year to 64 from a team of 70 in the previous year: consisting of 27 lawyers and 23 forensic accountants.

Key Themes from concluded cases

The most common accounting areas which arose on matters closed through Constructive Engagement were provisions and impairment. The most common audit failings were lack of challenge of management and professional scepticism, insufficient audit procedures performed, and insufficient coaching, supervision and review.

The most common accounting areas which arose in concluded investigations were: failure to exercise professional scepticism, failure to obtain sufficient appropriate audit evidence and failures in audit documentation continue to feature heavily. Concluded investigations also featured issues relating to compliance with ethical requirements, compliance with laws and regulations, presentation and disclosure and matters relating to going concern.

Ongoing cases at 31 March 2025

As of 31 March 2025, there were 32 open investigations (reduced from 35 in the previous year), 27 of which concern audit and five concern professional accountants working in business.

The FRC comment that this is also a reduction in the number of very large and complex investigations, resulting from its ongoing focus on timely conclusion of investigations combined with a lower than average number of investigations opened during the year.

Of the 27 audit investigations, 2 are under the Accountancy Scheme and the remaining 25 are under the AEP. Of the total 32 investigations, 21 have been announced.

Clyde & Co comments

• The main takeaway seems to us to be the relative stasis in matters being considered by the FRC, both in terms of new enforcement investigations opened and cases being considered by the Case Examiner and Case Assessment team. We speculated last year that the significant investment made by firms in improving audit quality would contribute to lower numbers of such matters, particularly the larger firms who have been on the receiving end of a significant proportion of the FRC’s sanctions over the past decade. Such investments may take time to bed in.
• Constructive Engagement is undoubtedly a useful process, but its pace is slowing. If that continues, the benefits it offers, allowing firms to take prompt, remedial action to seek to prevent similar issues arising in the future, may diminish. Our experience is that the process of Case Assessment and Constructive Engagement is becoming more akin to a mini-investigation entailing detailed submissions from firms.
• There has been a decline in matters being referred from the AQR process. We have seen an increase in horizon-scanning and in Case Examiner enquiries resulting from issues reported in the media.
• The FRC’s reference to information deriving from increasingly varied data sources: our recent experience is that the FRC is placing greater importance on having visibility of more informal communication channels between audit team members such as Teams messages and WhatsApp.
• We have seen increasingly expansive and forensic requests from the FRC for documents and data collection exercises, which add considerably to the time and cost of investigations. This is a particular imposition on smaller firms, which should be the subject of ongoing consideration by the FRC in the context of its commitment to proportionate regulation.
• The Review looks to the future but makes no mention of audit reform, and the possible transition of the FRC to a new regulator, ARGA, and how those things may impact upon investigations and enforcement activity.  Instead, the Review focuses on alternative projects: E2E and the Future of Audit Supervision Project. This is consonant with the letter from the Department for Business and Trade to the Business and Trade Committee of 21 July 2025, confirming that the draft Audit Reform and Corporate Governance Bill will not be put forward for legislative scrutiny in this parliamentary session. Instead the Department will refine and consult on its proposals so they too are fit for the future. The letter emphasizes an intention to listen closely to business: ensuring reforms strike the right balance between oversight and assurance for investors, whilst not placing unnecessary additional burdens on business.
• The FRC’s view forward focuses on quality in the context of the transition from ISQC (UK) 1 to ISQM (UK) 1 representing a significant shift in the approach to quality management. The FRC emphasizes that firms are now required to take a risk-based approach; to identify and respond to risks that could affect the quality of their engagements, considering both the nature and circumstances of their engagements and the firm, and to tailor their quality management approaches accordingly. There is a greater emphasis on the role of leadership and governance in embedding a quality-oriented culture.