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is this #metoo and more for audit firms?

While the global conversation continues about the rising number of reports of sexual harassment inside and outside the workplace, James Roberts, partner, and Natalia Jeremiah, senior associate at Clyde & Co., find that scrutiny of how professional firms respond to these and other misconduct issues has increased.

In the realm of audit, it emerged last year that 37 UK audit partners have left Big Four firms since 2014 as a result of harassment and bullying issues.

All this has led to calls for regulatory guidance and, where appropriate, intervention to address shortcomings in the way complaints are being dealt with.

FRC Announcement

Following in the footsteps of the regulators of other professions, the FRC announced on 24 July 2019 that it was asking the six largest audit firms to provide them, by 30 August 2019, with copies of their policies and procedures in relation to grievances, disciplinary matters and complaints from individuals outside the firm, covering not just complaints about sexual harassment and bullying, but also internal whistleblowing, discrimination and alcohol and other substance abuse – all referred to collectively as ‘non-financial conduct complaints’.

A process is also being put in place, rapidly, requiring firms to report regularly to the FRC on the level of non-financial conduct complaints being made and how they are dealt with. The process is to operate on a quarterly basis, starting from the quarter ending 30 September 2019. The first submissions are requested by 11 October 2019. 

In addition, the FRC has now made clear that the existing obligation on audit firms to notify them of incidents that could pose a threat to the reputation of a UK firm must be understood to include matters relating to non-financial misconduct – therefore covering sexual harassment, discrimination and bullying – and should not be limited to audit partners and RIs but should include all partners in the firm. 

The FRC is implementing these processes in conjunction with the ‘values and behaviour’ pillar of its Audit Firm Monitoring and Supervision (AFMAS) framework, with the stated aim of building on the FRC’s “current framework of interaction with the firm to understand and assess the design and effectiveness of the policies and procedures the firms have in place to facilitate the reporting of and response to non-financial conduct matters” and to gain “valuable assurance over the effectiveness of the monitoring arrangements that firms have in place, along with a picture across the industry of potential emerging areas of concern”.

Implications

It is not entirely clear what, if any, specific steps the FRC will want to take following receipt of the requested material, or whether this initiative will be taken forward by ARGA.  It also remains to be seen whether the ICAEW or ACCA will issue any more specific guidance around these issues. This all raises a number of questions, including:

  • What might the consequences be for a firm if the FRC considers its arrangements for addressing non-financial conduct issues to be deficient?
  • In the absence of clearer regulatory guidance, against what standards are a firm’s arrangements to be assessed?

Nonetheless, it seems clear that, as with other professions, this is an area in which we can expect regulators to have an increasing level of interest. It is also likely that the steps now being required of the larger firms will, in due course, inform the approach taken by regulators to the profession as a whole.

All firms should, therefore, ensure that they are confident of their procedures in this area, and the way in which they are administered when complaints of this nature are made. 

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