The UK government is to abolish the country’s audit and accounting regulator, the Financial Reporting Council (FRC), after its governance and effectiveness was heavily criticised in a recent review.
Business secretary Greg Clark yesterday announced that the FRC would replaced by a new body, the Audit, Reporting and Governance Authority, in line with recommendations made by Sir John Kingman, who led the review.
The UK’s department for business, energy and industrial strategy (BEIS) published a consultation aimed at giving the new watchdog “a new mandate, new leadership and stronger statutory powers”, and said it “intends to move swiftly to implement these reforms and overhaul the sector”.
In a statement yesterday, BEIS said: “In the interim period until the new regulator is in place, we will be working with the FRC taking forward 48 of the review’s recommendations to address the shortcomings identified in the review such as lack of transparency and to reinforce work to enhance enforcement activity.”
The new regulator will be able to enforce greater sanctions on companies and management in cases of corporate failure, the BEIS statement said. The FRC came under fire last year in the wake of the collapse of Carillion, the dividend disclosures of which it had used as an example of best practice just 12 months before the firm went bankrupt.
According to BEIS’s consultation, the new regulator is intended to:
- be a statutory body, giving it powers to make direct changes to accounts rather than apply to court to do so;
- conduct more “comprehensive, visible reviews for greater transparency”;
- have specific duties to “protect the interests of customers and the public by setting high standards of statutory audit, corporate reporting and corporate governance”;
- directly regulate the big audit firms; and
- be led by a “diverse board and strong leadership” to help change the culture of the accounting sector and “rebuild [the] respect of those it regulates”.
“This new body will build on our status as a great place to do business and will form an important part of strengthened public trust in businesses and the regulations that govern them,” Clark said.
Investors have been lobbying for audit regulation reform for years, with the UK’s local authority pension funds among the most vocal.
The Local Authority Pension Fund Forum, a lobby group representing 72 public sector schemes, first called for the FRC to be abolished in 2016 following a parliamentary consultation on corporate governance.
It reiterated this call last year in its submission to the Kingman review’s call for evidence, citing as evidence hundred pages of documents released to IPE under the UK’s Freedom of Information Act.
Baroness Sharon Bowles, a member of the UK parliament’s upper house and former chair of the European Parliament’s Economic Affairs Committee, has also criticised the FRC, claiming it was “fatally flawed in the way it was set up and has been operating”.
New regulator ‘vital’
Chris Cummings, chief executive of the Investment Association, said: “A high-quality audit is vital to ensure that investors have confidence in the information in a company’s annual report.
“A high-quality audit is vital to ensure that investors have confidence in the information in a company’s annual report”
Chris Cummings, the Investment Association
“The establishment of a new regulator that exists on a statutory footing will help drive standards in the UK audit market and cement the UK’s place as a global leader in corporate governance.
“It is vital that the new regulator is established as soon as possible and reflects the views of investors, who are one of the key stakeholders in the audit process. We look forward to responding to the consultation and working with the government to ensure that the investor voice is properly represented within the new regulator.”
Natasha Landell-Mills, head of stewardship at Sarasin and a member of the FRC’s recently appointed advisory committee, said: “We welcome the government’s announcement that it plans to press on with reconstituting the accounting and audit regulator.
“It should go without saying the Financial Reporting Council is not the right body to lead its own reform during the period of transition and further consultation. The sooner the government refreshes its leadership the better.”
The government said it would soon begin recruiting a chair and deputy chair for the Audit, Reporting and Governance Authority.
Stephen Haddrill, the FRC’s chief executive, had already signalled his intention to step down in late 2019.