UK audit regulator takes over Manchester City accounts inquiry

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UK regulator probes Man City

Highlights

Financial Reporting Council took over the Manchester City accounts investigation after an independent commission found the club overstated income via sham commercial deals.
The FRC is conducting preliminary enquiries into potential breaches by BDO and relevant Manchester City accountants and can impose fines or bans if a formal probe finds misconduct.
Limits in UK audit oversight mean the FRC cannot directly penalise Manchester City or compel non-accountant directors to provide information, highlighting regulatory gaps for non-public interest entities.

Regulator review shifts to FRC oversight

As reported by Financial Times, the Financial Reporting Council has taken over inquiries into the accountants who prepared and signed off on Manchester City's accounts after an independent commission found the club used sham commercial deals to overstate income and conceal its true financial position.

Dame Jayne-Anne Gadhia, chair of the FRC, says in a letter to Liam Byrne, chair of the UK parliament's business committee, that the watchdog is making preliminary enquiries to determine whether there are sufficient grounds to open a formal investigation. She says the FRC exercised its powers the day after the commission's findings were published last month to reclaim responsibility from the Institute of Chartered Accountants in England and Wales.

Manchester City is not classified as a public interest entity, a category that covers listed companies, banks and insurers, so oversight of its accounting and audits had initially fallen to the professional body rather than the FRC. The regulator says it is examining the commission's findings for their relevance to the club's financial statements and to audits carried out by BDO, which has audited City since 2007.

City, which has been owned by a member of Abu Dhabi's ruling family since 2008, disputes the commission's findings and has launched an appeal. The FRC says that appeal does not prevent it from pursuing its enquiries or taking further action.

Potential sanctions and wider audit oversight gaps

The FRC can investigate BDO as auditor as well as any Manchester City directors or employees involved in preparing the accounts if they belonged to a professional accountancy body at the time of the alleged misconduct. If a formal probe is opened and breaches of professional standards are found, the regulator can impose fines or bans on individuals and accounting firms.

The watchdog generally cannot penalise a company directly for misstatements in its accounts, although it can require accounts to be restated. Two senior BDO partners led the audits of City, and the firm's work is already under pressure after repeated criticism from the FRC in each of its past six annual inspections of leading firms' audits.

Gadhia also highlights limits in the regulator's powers, saying the FRC cannot pursue company directors who are not members of professional accountancy bodies. She adds that some businesses may be of significant public interest without meeting the current definition of a public interest entity, leaving the regulator unable to directly compel non-PIEs to provide information.

Byrne called on the FRC earlier this month to examine the matter, arguing it raises fundamental questions for the audit profession and urging the watchdog to hold those responsible to account. He says on X that the FRC's letter exposes gaps in its ability to compel evidence from the club and pursue directors, and raises broader questions about why planned reforms were abandoned. Manchester City and BDO do not immediately respond to requests for comment.

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