Accountants' Liability Update

Contents

1 The Kingman Review and the Memorandum of Understanding between the FRC and the FCA

2 Variations to contracts: Key change in the law

3 When do you know? A reminder of the trigger for knowledge under the Limitation Act

4 No assumption of responsibility for financial consequences of investment decisions

5 New enhanced powers for the pensions regulator

6 Reconsidered: Integrity and dishonesty in disciplinary proceedings

The Kingman Review and the Memorandum of Understanding between the FRC and the FCA

Following fierce public and Parliamentary criticism of the Financial Reporting Council for its handling of investigations into audit firms, in particular following the financial crisis and high-profile corporate collapses, the Government announced that Sir John Kingman would conduct a review of the FRC ("The Review").

The Review has recently issued a call for evidence and in particular is considering whether the regulator is as effective as it needs to be and whether any of its functions should move to other regulators, in particular the Financial Conduct Authority ("FCA"). Under the current arrangements often the FRC will investigate whether there has been any breach of a relevant requirement or misconduct by the auditor and the FCA will separately investigate the non-accountant directors.

On 20 December 2017 the FCA and the FRC entered into a revised memorandum of understanding (MoU), which sets out how the two regulators will share information each has obtained in the course of their oversight and how they will co-operate and co-ordinate where they have overlapping jurisdiction in disciplinary investigations.

This was intended to be a further step by the FRC to overhaul the way it investigates suspected accountancy and audit misconduct and to more closely align itself with the FCA's model of misconduct investigation and enforcement.

The 2017 MoU replaces the MoU agreed between the two regulators in 2013. While the principles for co-operation and co-ordination between the FCA and the FRC are broadly unchanged, the 2017 MoU provides more detailed mechanisms for information requests and concurrent investigations.

With respect to information requests, the 2017 MoU provides that the requesting party shall identify the information sought, the intended use of the information, and treat any disclosed information confidentially. The receiving party shall then confirm receipt and reply with the documentation in the agreed time period, notifying of any delays. It remains the case that the regulators cannot share privileged information received from a third party (unless privilege has been waived). A further important feature of the MoU is that the regulators will actively consider whether any information they obtain in the course of their investigations may be of interest to each other (so they may share information without having received a request).

Where both regulators have jurisdiction to investigate:

they will seek to agree which regulator will carry out the investigation, or whether both regulators will investigate. If they agree that both regulators will investigate, they may agree that the investigations will run in parallel, or that one will proceed before the other, depending on the circumstances. If one investigates after the other, the first will keep the other updated regularly on material aspects of the investigation. If the investigations are run in parallel, the regulators will seek to co-ordinate e.g. by conducting joint interviews of witnesses. The regulators will also seek to coordinate publication of their respective enforcement decisions: they will provide 24 hours' notification before any press release or public statement, and may agree to simultaneously publish the outcome of their respective investigations. The 2017 MoU also provides clarification of the FCA's and FRC's respective roles. Broadly, the FRC's role is to promote transparency and integrity in business, and high quality corporate governance and reporting to foster investment. In addition, the FRC has a role under the Transparency Directive, to examine whether information referred to under the Directive is drawn up in accordance with the relevant reporting framework and to take measures where there has been an infringement. The FCA's role is to maintain the integrity of financial services providers by adopting a market-based approach to supervising firms, investigating individuals and firms, and bringing criminal prosecutions.

Conclusion

The Kingman Review has recently published a call for evidence across a range of areas including (1) the FRC's purpose and function; (2) its impact and effectiveness; (3) its role in setting audit regulation; (4) the speed and effectiveness of investigations, enforcement and compliance; (5) the powers and sanctions regime; and (6) staffing and resourcing.

In circumstances where directors may have misled a company's auditors or been actively involved in fraudulent activity or have failed to make proper and adequate disclosure of known issues, it is understandable that there are increased calls for the FRC's investigation function to be incorporated into the FCA so as to ensure that the same body is investigating both the directors and auditors. The current regime (set out above) where-by different regulators investigate different parts to the same story is far from ideal. To that end the report of Kingman Review will be keenly awaited.

Variations to contractual terms: Key change in...