The UK audit regulator has seized control of inquiries into the accountants who prepared and signed off on Manchester City’s accounts following findings that the football club artificially inflated its financial position by more than £900mn.
Dame Jayne-Anne Gadhia, chair of the Financial Reporting Council, said on Tuesday that the watchdog had reclaimed responsibility from a professional body for examining the accounts and how they were audited.
As well as using “sham” commercial deals to overstate its income, the club had “filed misstated accounts and concealed the true state of its finances” over a period of nine years, an independent commission found in a decision published last month.
Gadhia said the watchdog was making “preliminary enquiries” to assess whether there were sufficient grounds to open a formal investigation, in a letter to Liam Byrne, chair of the UK parliament’s business committee.
City is not classified as a “public interest entity”, a designation given to listed companies, banks and insurers, meaning responsibility for overseeing the quality of its accounting and audits initially fell to the Institute of Chartered Accountants in England and Wales, a professional body.
However, Gadhia said that the day after the publication of the commission’s findings the FRC had exercised its powers to take over inquiries into the preparation of the accounts and the quality of the work of auditor BDO.
She said the watchdog was examining the commission’s published findings to check their relevance for Manchester City’s financial statements and the audits by BDO.
City, owned by a member of Abu Dhabi’s ruling family since 2008, has disputed the commission’s findings and has launched an appeal. The FRC said this did not prevent it from “pursuing our enquiries and any further activity”.
BDO, the UK’s fifth-biggest accounting firm and self-described football “market leader”, has audited the football club since 2007.
The FRC has powers to investigate both BDO as the auditor as well as directors or employees at Manchester City who helped prepare its accounts and were members of a professional accountancy body at the time of the alleged misconduct.
If it were to open a formal probe and find breaches of professional standards, the FRC has powers to impose fines or bans on the individuals and accounting firms involved. It does not generally have the power to penalise a company for misstatements in its accounts, though it can demand that they be restated.
Two of BDO’s most senior partners led its audits of City. Scrutiny of its work for the football club comes after concerns about the quality of the firm’s audits of other companies, with the FRC heavily criticising its work in its past six annual inspections of the leading accounting firms’ audits.
Gadhia’s letter also highlighted what she called “limitations” on the regulator’s powers. The FRC cannot pursue company directors who are not members of professional accountancy bodies.
She added that some businesses may be of “significant public interest” but are not included in the current definition of “public interest entities”, which can pose challenges as the FRC does not have the power to directly compel non-PIEs to provide information to it.
Gadhia’s letter came after Byrne called on the FRC this month to examine the matter, saying it raised “fundamental” questions for the audit profession and urged the watchdog to “hold those responsible to account”.
The FRC’s letter “exposes gaps in its ability to compel evidence from the club and pursue directors”, Byrne said in a post on social media site X on Tuesday.
“This raises serious questions about the powers available to hold companies and directors to account,” he added. “The government has a responsibility to explain why reforms to close these gaps were abandoned.”
Man City and BDO did not immediately respond to requests for comment.