The Financial Reporting Council (FRC) has launched a public consultation on proposed updates to its Audit Enforcement Procedure (AEP)

In 2024, the FRC commenced a review of its Audit Enforcement Process (AEP). As part of this review, the FRC considered its governance structures, decision-making processes and the operational efficiency and effectiveness of the AEP. The FRC has now launched a public consultation on proposed revisions to the AEP and seeks responses from its stakeholders. The FRC plans for the effective date of the revised AEP to be 1 July 2026.

The FRC’s proposals

The FRC’s proposed changes to the AEP introduce the following additional three routes to resolution:

1. Accelerated Procedure;
2. Early Admissions Process; and
3. Published Constructive Engagement

These additional routes, along with the existing routes, are intended by the FRC to provide a wider range of options to the Conduct Committee from which to select a suitable response to the circumstances of individual cases.

The FRC’s review also considers how to improve the timeliness of the AEP processes.

The Case Assessment process

Currently, the Case Examiner is responsible for deciding which matters should go before the Conduct Committee [1]. The Case Examiner makes recommendations as to the most appropriate outcomes of those available to the Conduct Committee.

The FRC proposes to remove the role of an individual Case Examiner and replace it with a Designated Officer. The Designated Officer will be an officer of the FRC and will be responsible for determining whether a question of a breach of a Relevant Requirement is raised (in which case they will refer the matter to the Conduct Committee), as well as making recommendations to the Conduct Committee.

The Designated Officer will have no power to determine outcomes, other than when they find that no question of a breach is raised. The proposals anticipate that the case assessment functions and process will otherwise continue to be undertaken in a similar manner to now at an operational level, with oversight from the Designated Officer.

The Conduct Committee

The FRC delegates responsibility to the Conduct Committee for deciding whether to open investigations. The FRC proposes to reword the test applied by the Conduct Committee when considering whether to open an investigation (that test currently being whether “there is a good reason to investigate”) and replace with it a test to be applied by the Conduct Committee under proposed Rule 8 when considering the appropriate response to a referral from the Designated Officer.

The first limb of the test will be to consider whether there are “reasonable grounds to suspect that a Statutory Auditor and/or Statutory Audit Firm may have breached a Relevant Requirement”.

The second limb of the test will be to consider whether opening an investigation is in the public interest. The Conduct Committee will be required to refer to an updated, non-exhaustive list of public interest factors which will contained in the supporting materials for the AEP [2].

Presumably it would be necessary for the FRC to update its existing Guidance on the Opening of Investigations to take account of these changes.

Having decided that there are reasonable grounds to suspect a breach may have occurred and considered the public interest, the Conduct Committee must then determine which of the available options for responding is to be taken. These options will continue to include (a) an attempt by a Designated Officer to resolve the matter through Constructive Engagement; or (b) referring it to Executive Counsel for investigation; or (c) deciding to take no further action. To these options it is proposed to add those of (a) Published Constructive Engagement; and (b) Accelerated Procedure. The draft revised AEP stipulates that respondents would receive a notice from the Conduct Committee informing them as to which of these procedures has been determined should be applied in the matter in question.

Additional routes to resolution

Published Constructive Engagement

Constructive Engagement, which will remain a potential option for resolving matters, involves the FRC working with the audit firm or auditor in agreeing and overseeing the implementation of actions to address issues raised. The FRC’s proposals introduce a further alternative route to resolution whereby cases can enter Published Constructive Engagement (“PCE”), allowing the allocation of a matter to Constructive Engagement, and the outcome to be published. This course may be selected by the Conduct Committee based on its consideration of the significance of the matter before them and the public interest. The consultation notes that for a case to go through Published Constructive Engagement, it will require the consent of the audit firm and any individual auditors involved. At present it is unclear at what stage this consent will be sought.

The consultation notes that the FRC’s aim is to equip the Conduct Committee with another form of regulatory response that will serve as a deterrent, and benefit other audit firms, and it is intended that this route would provide a suitable alternative to an investigation. Audit firms may be required to pay the FRC’s costs, or a proportion of them, but the matter would not be subject to sanctions.

The FRC will publish a public statement when an audit firm enters PCE which will detail that the firm had entered PCE with the FRC and set out generally the issues being addressed. The FRC will also register this case on its website alongside other active PCE cases. A statement will also be published at the conclusion that summarises the concerns raised and the key actions taken by the audit firm in response. The statement may also detail the costs paid by the audit firm and how the matter has been resolved through PCE.

The FRC does not propose for public statements relating to PCE to include the name of the audited entity or auditor or identifiable details.

It appears that it is intended that the FRC will produce revised guidance in relation to Constructive Engagement and PCE in conjunction with the revised AEP.

Accelerated Procedure

The FRC proposes to introduce an additional route to resolution, the Accelerated Procedure, as set out in Part 5 of the draft revised AEP. This route enables the FRC to determine breaches and issue sanctions using existing evidence held by the FRC without the requirement to open an investigation. The Accelerated Procedure will be limited to cases where the Conduct Committee (under proposed rule 8) has determined that at the time of its decision on the appropriate resolution route under proposed Rule 8, the Conduct Committee had obtained sufficient information (“the Relevant Information”) to provide a basis for assessing (a) whether a breach of Relevant Requirements has been committed, and (b) if so, whether the Respondent should be liable to Enforcement Action.

Under this procedure, Executive Counsel would be entitled to use its evidence-gathering powers that are available to them in an investigation (including requiring documents and interviews). Executive Counsel would then perform a two-stage determination under proposed rule 49 on the same criteria as that performed by the Conduct Committee (i.e as to whether there was breach and whether there should be liability) by reference to the information then available.  If Executive Counsel determines those criteria are met, they would then enter into settlement discussions with the Respondent, which would engage the existing settlement rules of the AEP (including requirements for sanctions and the FRC’s costs to be included in a Proposed Decision Notice setting out the breaches of relevant requirements).

The Conduct Committee will have discretion to announce the opening of an Accelerated Procedure case and all cases resolved through this route will require publication at their conclusion.

The FRC proposes that the Executive Counsel will be able to return cases to the Conduct Committee in situations where a settlement is not agreed under the Accelerated Procedure for consideration of an appropriate alternative regulatory response.

Early Admissions Process

Where an AEP investigation has been commenced by the Conduct Committee, the FRC proposes to allow the Executive Counsel to consider the Early Admissions Process (“EAP”) route under Part 3 of the draft revised AEP. Unlike the Accelerated Procedure, the EAP is not an alternative to the commencement of an enforcement investigation. 

The FRC intends that this procedure will enable auditors to carry out their own review under FRC oversight and admit any identified breaches, with a view to saving time and cost.

Auditors seeking resolution through the EAP will be required to notify Executive Counsel of their interest in pursuing this route within 28 days of receiving a Notice of Investigation. This seems a tight timescale, and potentially uneven in its application given that in some cases historically there has been very little advance notice to firms of the referral of a matter to the Conduct Committee, and in contrast in other cases there may have been many months of process involving the Case Examiner.

On receipt of a notification of interest in EAP, Executive Counsel will then determine whether EAP is appropriate for the case and consider the terms of the review. The consultation states that the EAP will not be permitted where criminal conduct is suspected, and is unlikely to be a route taken where a lack of integrity is suspected or there is a failure of co-operation.

Executive Counsel and the auditor will need to agree arrangements for the EAP in order for it to proceed. The auditor will be required to provide an “EAP Factual Account” (according to a scope to be agreed), together with “all supporting material and evidence”, within a specified deadline (no longer than 6 months). A process will also be agreed for the auditor to attest to the completeness of the EAP Factual Account provided and the robustness of enquiries made in preparing it. Executive Counsel will determine whether the material provided by the auditor under investigation is sufficiently accurate and complete for the purposes of entering into settlement discussions. Executive Counsel may require the provision of further information if necessary.

Having considered the EAP Factual Account, Executive Counsel may choose to enter into settlement discussions, continue with the investigation or decide to take no further action. The draft rules set out no timescale for Executive Counsel to make that decision. Settlement would again be governed by the existing AEP rules relating to Proposed Decision Notices, sanctions and costs.

The Executive Counsel may terminate the EAP at any time where it appears appropriate to do so, and then pursue an investigation.

The consultation notes that achieving an early settlement outcome through the Early Admissions Process would amount to exceptional cooperation, and that this will attract a maximum discount of 60% on financial sanctions to reflect the self-awareness and preparedness to acknowledge shortcomings that this will require, and the less intensive resourcing requirements associated with an investigation. The consultation states that this is “higher than the 50% otherwise available under the AEP”.

Implementation

The FRC plans for the effective date of the revised AEP to be 1 July 2026, subject to the outcome of the consultation. From 1 July 2026, all open case assessment enquiries will be subject to the new processes outlined in the FRC consultation. The changes to the AEP, including the reworded test for opening investigations and pursuing other routes for resolution will also have effect from 1 July 2026.

The FRC’s request for feedback

The FRC actively seeks feedback and comments from audit firms, professional bodies, law firms and users of audited financial statements and invites responses by Friday 9 January 2026.

Initial comments

Clarification required of new procedures

The current proposals are thin on detail and policy. Some further clarification may emerge from later published guidance to accompany the revised AEP, but it may be thought helpful for such guidance to be issued in draft and made the subject of further consultation given its likely significance.

For example, it is unclear at present:

1. what would be the determining factors in the Conduct Committee deciding that a case is more appropriate for Published Constructive Engagement rather than investigation, based on its significance and the public interest;
2. what would be likely to be regarded by the Conduct Committee and Executive Counsel as “sufficient” Relevant Information for the purposes of the Accelerated Procedure;
3. what level of detail would be required for the “EAP Factual Account”;
4. what extent of supporting evidence would be required for the “EAP Factual Account”;
5. in what circumstances and to what extent Executive Counsel would choose to use investigatory powers to obtain evidence under the Accelerated Procedure. The absence of a clear framework on this aspect could be significantly deleterious to the attractions of such a process;
6. whether and to what extent (if any) root-cause analysis would be required or expected in any of these new procedures.

A number of these matters (in particular (2) to (5) above) are clearly relevant to the question of whether the alternative procedures would represent a significant saving of cost and effort, and will result in a significant time saving

Both the Early Admissions Process and the Published Constructive Engagement routes would require the consent of respondents; it is not clear however whether these routes would be open to an audit firm respondent to accept if an individual RI respondent were to decline them (or vice versa).

Finally, although the Accelerated Procedure under the AEP provides for Executive Counsel to exercise the AEP investigation powers to require evidence, a question falls to be considered as to whether Executive Counsel is able to derive those powers from SATCAR when using the AEP to investigate the audit of an entity that is not a PIE. For audits of non-PIEs, SATCAR provides powers to require information for any “purpose related to inspecting or investigating statutory audit work”. The terminology used in the AEP does not necessarily map neatly on to the concepts deployed in SATCAR, and the SATCAR power is therefore potentially broader than the narrow definition of investigation used in the draft revised AEP to distinguish formal investigations from other procedures.

Calls for reform that do not appear to have been addressed

Whilst some members of the profession were hoping for more far reaching changes in other respects, the draft revised AEP does not contain any proposals to revise the policy on publication of commencement of investigations. It remains to be seen whether forthcoming revised guidance will address this.

The consultation and draft revised AEP moreover contain no proposals specifically directed towards refocusing the application of enforcement powers against individual RIs, and no discussion of how the new proposals might be used to achieve a more proportionate outcome for individual RIs. For example, in considering routes such as Published Constructive Engagement, it might be helpful for the Conduct Committee to be required to consider the level of personal culpability of an RI and the impact of their decision on the RI personally and the audit profession more generally. Indeed, it could be suggested the negative impact of enforcement decisions on the morale of the audit profession and its ability to attract and retain high quality personnel ought to be a public interest consideration that is included in any forthcoming revised guidance for the Conduct Committee.

There is no indication of any plan to change the appeals process for Tribunal decisions which has been long called for; however, legislation would be needed in order to provide a right of appeal to the Courts.

Litigation privilege and information requirements

In the event that the AEP is revised along the lines indicated in the consultation, it will be necessary for respondents and their legal advisers to give fresh consideration to the potential challenges that some aspects of the new procedures might present to claiming litigation privilege. In this regard, it appears potentially significant that the Accelerated Procedure is formulated within the revised AEP as an alternative to formal investigation rather than as a subspecies of investigation.

This anomalous categorisation might also present challenges for dealing with enquiries from other regulators, insurers, or clients as to the existence of regulatory investigations.

Insurance cover

We also note that the proposed new routes to resolution (Published Constructive Engagement, Accelerated Procedure and Early Admissions Process) may result in firms and/or RIs being required to pay FRC costs, and in the case of Accelerated Procedure and the Early Admissions Process may result in FRC fines. Policyholders will need to consider whether these costs and fines are covered under their existing policy wordings or whether a revised or extended wording needs to be negotiated.

Client confidentiality

The Early Admissions Process would involve a specific agreement to the provision of information and evidence as part of an agreed process within the overall formal investigation procedure. The draft revised AEP includes a provision at draft rule 25 for Executive Counsel to “require production” of the material in question; such a requirement would seem likely to overcome confidentiality obligations but it might be helpful for the draft revised AEP to stipulate that Executive Counsel serves a written notice requiring this material so that the rules provide for a clearly documented regulatory requirement for specific material, rather than a vaguely articulated oral request.