AAT joins debate on future of FRC
"Toothless" and "useless" are just a couple of the words used to describe the Financial Reporting Council.
In fact, the accounting industry watchdog is presently the subject of an 'independent' review led by former L&G chief and top Treasury official John Kingman.
Conflicts of interest and handling freedom of information requests are two areas where the FRC's behaviour has come under scrutiny. Its efforts to regulate the Big Four auditors have fallen short. Take Carillion as just one example.
Evidence from interested parties
So the review is going ahead as we speak. Kingman recently made a call for evidence from interested parties to help he and his panel to look at the FRC and the following areas:
- Role and purpose
- Effectiveness and its powers
- Potential role in preventing corporate failure
- Legal status and relationship with the government
- Governance and leadership.
He says: "The FRC’s work is critical to financial markets, the economy and public confidence. Trust, quality and credibility are the questions at the heart of today’s consultation. The review wants to hear the widest possible range of views on how the regulatory system can best deliver for the future."
Flavour of its opinions
One group - there will be many - to express its views on the FRC is the Association of Accounting Technicians. The organisation that has 50,000 full and fellow members, plus 90,000 student members is fairly forthright. Here's a flavour of some its opinions about the FRC, which are included in its submission of evidence to the Kingman probe. The full AAT response can be read here.
- The FRC has presided over a catalogue of audit failure that has brought its own existence into question. It failed to investigate the audits of most of the UK banks that played a role in the 2007-8 financial crisis and in September 2017 the FRC closed its investigation into the auditing of HBOS by stating that KPMG’s performance, “…did not fall significantly short of the standards reasonably to be expected.” It has been widely criticised for its performance in dealing with the collapse of both BHS and Carillion and on Corporate Governance its changes to tackle excessive executive pay are said by the FRC to be “world leading” but are entirely lacking in effectiveness.
- Looking to the rest of the world will be unlikely to provide a very effective solution to the challenges faced here in the UK. For example, Norway, having failed to implement EU legislation on audit, is listed as having the world’s second-best auditing standards according to the influential World Economic Forum Global Competitiveness Report (2017-18)
- If the FRC is unable to evolve and change its culture then its primary function of regulating accountants, auditors and actuaries could be transferred. This function could go to another department such as BEIS, an expanded FCA or even to the relevant professional bodies.
- If the FRC were to mirror the FCA approach to prioritising its work based on the potential for consumer harm this could avoid harm. For example, taking into account issues such as public funding, the number of employees, importance to the British economy etc.
- The FRC should do whatever it can to promote competition. Ofgem, Ofwat, the FCA and PRA all have clearly stated objectives to promote competition. Promoting competition is unlikely to cause any harm whilst it could achieve much.
- The FRC should consider adopting the FCA model of seeking to identify emerging trends and risks before they materialise. This could be done by undertaking forward looking market studies and data analysis and reacting accordingly. By doing so, the risk of major corporate failure, whilst not eliminated, could probably be reduced.
- The recent appointments of Julia Unwin CBE and Jenny Watson CBE (April 2018) are welcome. They bring much needed broader experience as well as doubling the number of women on what was previously a very male-dominated board. These appointments should not be the end of the process but the beginning and the FRC may wish to look at how it operates at grades below board level too.
- Along with various other stakeholders, AAT has consistently stated that any extra powers the FRC receives, any change in FRC structures or accountability or status, may well prove inadequate without a change in culture, mindset and outlook.
