The Financial Reporting Council (FRC) has issued a Final Decision Notice under the Audit Enforcement Procedure and imposed sanctions against Haysmacintyre LLP (Haysmacintyre) and David Cox, Audit Engagement Partner, in relation to the statutory audit of the financial statements of Associated British Engineering plc for the financial year ended 31 March 2018 (2018 Financial Statements).
The following sanctions have been accepted:
- A declaration by Executive Counsel that, as a result of the Adverse Findings set out in the Final Decision Notice, the Statutory Audit Report signed on behalf of Haysmacintyre did not satisfy the Relevant Requirements;
- A Severe Reprimand;
- A financial penalty of £125,000, discounted for mitigating factors, admissions and early disposal so that the financial penalty payable is £70,000.
- A declaration by Executive Counsel that, as a result of the Adverse Findings set out in the Final Decision Notice, the Statutory Audit Report signed by Mr Cox did not satisfy the Relevant Requirements;
- A Severe Reprimand;
- A financial penalty of £17,500 discounted for mitigating factors, admissions and early disposal so that the financial penalty payable is £10,000.
The Respondents will also pay Executive Counsel’s costs of the investigation.
Haysmacintyre and Mr Cox have admitted breaches of Relevant Requirements in six areas of audit work:
- Journal entry testing;
- Revenue recognition and debt recovery;
- Defined benefit pension scheme;
- Documentation of audit work on going concern; and
- Review and supervision of the audit.
The breaches admitted were pervasive, extensive and, in relation to the audit of inventory, serious. The requirements of multiple International Standards on Auditing (UK) (ISA(s)) were breached including ISA 220 (quality control for an audit of financial statements), ISA 230 (audit documentation), ISA 240 (the auditor’s responsibilities relating to fraud) and ISA 330 (the auditor’s responses to assessed risks).
In their audit work on inventory, the Respondents failed to exercise both sufficient professional skepticism and reasonable professional judgement; they did not obtain sufficient appropriate audit evidence to provide a reasonable basis for the auditor’s opinion. In two other areas (journal entry testing and defined benefit pension scheme) the Respondents failed to conduct the Audit so as to obtain sufficient appropriate audit evidence in accordance with ISA 500.
The Final Decision Notice does not make a finding that the 2018 Financial Statements contained any misstatement and Executive Counsel has accepted that the breaches of Relevant Requirements were not intentional, dishonest, deliberate or reckless.
The sanctions determined by Executive Counsel reflect, among other things, the fact that Haysmacintyre has already undertaken an extensive programme of remedial measures designed to address the shortcomings evident in the audit work in question following a report by the FRC’s Audit Quality Review team on the audit of the 2018 Financial Statements.
Executive Counsel further acknowledges the exceptional level of co-operation given by Haysmacintyre and Mr Cox during the course of the investigation. This has included undertaking a detailed investigation into the failures that led to the breaches and sharing those findings with the FRC.
Claudia Mortimore, Deputy Executive Counsel to the FRC, said:“Haysmacintyre’s audit contained a number of significant failings, including a failure to exercise sufficient professional scepticism, failure to obtain sufficient, appropriate audit evidence and a failure to document the audit work properly. … The imposition of the sanctions, and the FRC’s oversight of the extensive programme of remedial measures agreed with the firm, should lead to audit quality improvements.”
A link to the Final Decision Notice can be found here.