Why has my company been targeted?
There are a number of reasons why you might have received a letter from the Panel. The Panel selects accounts for review in a number of ways. First, the Panel discusses with the Financial Services Authority and the FRC's Standing Advisory Group which sectors of the economy are under strain or likely to give rise to difficult accounting issues. The Panel then selects a number of sectors and reviews a selection of accounts in each. Second, the Panel is also developing its own risk model to identify cases where accounting problems are more likely - cases of poor corporate governance for example. Thirdly, the Panel looks at specific topical accounting issues and, last but not least, responds to complaints from the public.
Does this mean that some one has complained about my company?
Not necessarily. As explained above, the Panel carries out a targeted review programme and there are a number of reasons why a company's accounts may be chosen for review. The Panel will not disclose the reason for selection, nor whether there is a complainant in the case.
Have the tax authorities complained about our accounts?
HM Inland Revenue and Customs can refer cases to the Panel but they will tell the company in advance in accordance with the Memorandum of Understanding.
The letter states that the Panel has not yet opened an enquiry into the accounts of the company and is requesting further information to enable it to decide whether it should do so. What is the difference between asking questions about the accounts and opening an enquiry?
The Panel raises questions with a company where there is, or may be, a question as to whether the accounts comply with the relevant accounting and reporting requirements in respect of a certain issue. In many cases, it is not possible to reach a conclusion from the information provided in the accounts alone. In these cases, the Panel will ask for further information. If, on receipt of that information, it concludes that the accounting treatment was appropriate, it will close the case without having opened a formal enquiry. If, having reviewed the further information, it concludes that there may have been a significant breach of accounting or disclosure requirements then it will open a formal enquiry in order to investigate the matter in more detail. When a formal enquiry is opened, a Panel Group will be established to consider the matter
If no Group is established until after a formal enquiry is opened, who is looking at the accounts up to that date, and who decides whether or not to open an enquiry?
Accounts are initially reviewed by Panel staff who provide a preliminary analysis with recommendation as to a course of action to the Chairman and Deputy Chairman. The Chairmen can also consult with Panel staff, Panel Members or external consultants during the initial consideration of a case.
What should I do when I receive a letter?
First of all, you should acknowledge receipt of the letter and provide an indication to the Panel of when you expect to be in a position to provide a substantive response. The Panel would usually expect to receive a substantive response within two or three weeks of receipt, but this may be four weeks if the matter raised is a complex issue. If, exceptionally, you consider that it will take longer to provide a response, or if you are approaching a reporting date, then this should be discussed with the Panel Secretary as soon as possible. The Panel expects companies to respond to its enquiries reasonably promptly and reserves the right to comment adversely on those who do not.
The Panel often raises questions because it has not been possible to tell from the published accounts whether the accounting treatment adopted for a particular transaction meets the requirements of the Companies Act, including accounting standards. In many cases, the matter may be resolved simply by providing full information about the transaction and the reasons for the accounting treatment adopted. A full response can often lead to an early closure of the matter. Conversely, where the Panel does not receive a sufficiently detailed response to allow it to reach a conclusion, the company can expect to receive further requests for information.
It is often advisable to discuss matters with the company's auditors at an early stage in considering a response to any question raised by the Panel. The auditors may already be familiar with the issue and be able to advise on how best to respond.
The Panel expects a company response to provide detail on the accounting standard or other requirement that has been followed.
If, as a result of considering the matters raised by the Panel, it becomes apparent that a change in accounting policy, or a correction of numbers or disclosures is advisable, you should discuss this with the Panel before taking corrective action.
Do I need to inform the market?
Companies must take their own decisions about informing the market. The Panel will only issue a press notice at the stage where either agreement has been reached to amend a set of accounts or where the Panel has decided to pursue a matter to court. A request by the Panel for information, or even the opening of a formal Panel enquiry would not usually be considered a price sensitive event as, in many cases, the matter can be resolved by the provision of further information. The company directors are, however, responsible in each case for deciding whether or not to inform the market. Any public announcement by the company which refers to the Panel should be discussed with the Panel in advance.
Should I discuss this issue with my auditors?
There is no requirement to do so but it is generally advisable. Your auditors may already have considered the issue that has been raised and will be able to assist in drafting a response. They can also attend any meetings with the Panel should you so wish.
Should I tell the Audit Committee?
There is no legal requirement to do so, but the consequences of a Panel investigation can be serious and the Panel would expect an Audit Committee to be informed from the outset.
Will there be a press notice?
Not necessarily. The vast majority of cases are resolved without a press notice. Press notices are issued only where a significant correction to published accounts is being made or where there is a case that the Panel considers otherwise merits publicity.
Will the Panel keep matters confidential?
Yes. The Panel's rules on confidentiality are set out in its Operating Procedures. Apart from the Chairman or Deputy Chairman, Panel members are normally not aware of enquiries which relate to Groups other than their own. Papers relating to each Panel case are filed securely in the offices of the Secretariat and are retained in accordance with the Panel's retention policy. Care is taken to ensure that there is no unauthorised access to such papers by other persons within the general FRC office.
Is the Panel subject to the Freedom of Information Act?
Not currently.
In what circumstances would the Panel make the enquiry public?
The Panel may make an announcement at the conclusion of an enquiry where the directors have agreed that the report under review was defective and requires corrective action. The company is invited to comment on any draft press notice.
The Panel may make an announcement on any application to court and at the end of court proceedings.
Where the FRC considers that the public interest requires it, the FRC may request the Chairman of the Panel to state whether a particular report is under review. The Chairman may accede to this request, and may also make such a statement on his own initiative if he believes that public interest requires it.
The Panel may, from time to time, report publicly on the results of its enforcement activity. Unless a press notice has already been issued, this report would not normally refer to any company by name.
Where information is forwarded by the Panel to other bodies, as permitted by the Companies Act, the Panel would usually inform the company, but reserves the right not to do so. The Panel is permitted, under the Companies Act, to forward information to the Treasury, the FSA, the DTI and HM Inland Revenue and Customs.
I believe that the Panel letter is the result of a malicious complaint. Can I find out whether this is the case?
No - the Panel does not reveal whether its approach is prompted by a complaint or its own review programme. It does not reveal the identity of complainants. However, it will look at the complaint before writing to you and will only write if it believes that there may be a case to answer.
The Panel has asked for copies of certain documents. Do I have to provide them?
The Panel relies upon the voluntary co-operation of companies. It does, however, have reserve power to require information under the Companies Act. When it uses this power to require information it will tell you that it is doing so.
I would like to discuss the matters raised. Can I ask for a meeting with the Panel?
Yes. Two types of meeting are available. The most common type of meeting is one with the entire Panel Group. This provides an opportunity to provide further information about the company, discuss the various matters at issue and to make representations about the accounting treatment used. It is often most useful when the matters at issue are complex, or where the company's business is specialised. This type of meeting is also commonly held when the Panel has reached a conclusion on the issues raised. At this meeting, the corrective action to be taken, if any, would be discussed. The Panel would normally expect that a company's finance director would attend and it is often advisable to invite the auditor as well. It is unusual for legal representatives to attend.
A second type of meeting is a technical meeting. This is a less formal meeting and is usually with one or two members of the Panel and Panel staff. The purpose of a technical meeting is to discuss complex accounting issues that may have arisen to ensure that both the Panel and the company fully understand the issues raised. No decision on corrective action would be taken at a technical meeting.
The Panel may request a meeting. Equally, a company may ask for a meeting at any time during an investigation. Panel members sit on the Panel on a voluntary basis and are often fully employed in senior positions elsewhere. To ensure that meetings take place on a timely basis it is helpful if companies can be flexible in providing availability for such meetings.
I don't agree with the Panel's opinion. Can I appeal?
If a company continues to disagree with the Panel, the Panel can only enforce its views by going to court for an order requiring directors to restate a company's accounts. The 'appeal' is therefore the court case, including any further appeal process that may be invoked by either party following an unfavourable judgement.
What penalties can the Panel enforce if it concludes that there has been a breach of accounting standards? Can the directors be made personally liable?
The only remedy open to the Panel is to require a restatement of the defective accounts. If this is as a result of a court order, the court could require the company directors to pay costs of restatement personally. The Panel has no powers against directors, but can, at its discretion, refer matters to other authorities including appropriate professional bodies.
To date, the Panel has not applied to the court for the restatement of the accounts of any company. It is usual for agreement to be reached between the Panel and a company as to the appropriate action to be taken in any case where a breach of accounting or reporting requirements has been identified. This action can involve the reissue of a set of accounts or can take the form of prospective correction, with improved or amended disclosures or accounting in future sets of accounts. In some cases, all that is needed is fuller disclosure to enable transactions and accounting treatments to be better understood by users.
What powers does the Panel have?
The powers of the Panel derive from the Companies Act 1985 and the Companies (Audit, Investigations and Community Enterprise) Act 2004. The Panel is the body appointed by the Secretary of State to enquire into the accounts of companies and where necessary apply for a court order requiring their revision. The Panel has also been authorised to keep under review periodic reports and accounts produced by issuers of listed securities that are required to comply with the accounting requirements of the listing rules. Where it thinks fit, the Panel is authorised to inform the Financial Services Authority of any conclusions reached by it in relation to such reports or accounts.
The Panel has powers to apply to court to require the production of documents, information or explanations by a company or any officer, employee or auditor of the company where it appears to the Panel that there is, or may be, a question whether the annual accounts of a company comply with the requirements of the Companies Act.
With effect from 1 April 2006, the Panel's powers will extend to directors' reports.
See Powers for a full description of the Panel's authorities and powers.
This is a very busy time for my company. Can I ask the Panel to delay its enquiry?
Defective accounts could mislead the public, so the Panel's procedures need to allow for speedy rectification. The Panel does not, therefore, generally allow companies to delay the initiation of an enquiry into its accounts. It does, however, recognise that there may be circumstances that make it difficult for a company to respond to its enquiries within what it considers to be a reasonable timeframe. For example, the company may be engaged in a takeover or acquisition, or the Chairman or Finance Director could be absent. Where a company anticipates difficulty in responding to the Panel within a reasonable time, it should contact the Panel secretary as soon as possible to discuss this. The Panel will consider these circumstances on a case-by-case basis.
The Panel's enquiry has cost the company a lot of time and money. Can we claim compensation?
No. The Panel does not enter into correspondence with a company unless there are matters that have come to its attention that lead it to believe that there may have been a breach of accounting or reporting requirements.
I am not sure about the correct accounting treatment to adopt for a particular transaction. Can I ask the Panel for clearance in advance of publishing the accounts?
The Panel does not operate a system of advance clearance and is unable to give advice to a company or its auditors as to whether, in its opinion, a particular accounting treatment would or would not meet the requirements of the law or listing rules.
