In April the government launched an independent review of the Financial Reporting Council (FRC), the regulator for auditors, accountants and actuaries.

AIA’s response to the Independent Review of the Financial Reporting Council Call for Evidence, which can be read here, highlighted the following:

                    • The key reforms needed to protect the regulation of audit in the United Kingdom relate to transparency and independence and the FRC must revolutionise its approach to avoid any criticism of ‘regulatory capture’.
                    • Any extra powers the FRC receives and any change in FRC structures, accountability or status will only be effective alongside a substantial change in culture. If the FRC is unable to evolve and change its culture, then its primary functions of regulating auditors and actuaries and improving audit quality should be transferred.
                    • The FRC or its equivalent should also seek to review risk in setting out regulatory priorities with a stated aim of reducing the risk of corporate failure.
  • Names are important: the FRC’s name does not inspire confidence that it is sufficiently focussed on the enforcement and regulation of the audit environment and AIA recommends a new independent non-ministerial department approach.
  • As a public body the FRC must acknowledge its function and responsibility as a regulator and should have a level of accountability provided by a government department or similar reporting function. The Department of Business, Energy and Industrial Strategy (BEIS), or equivalent, should report publicly on how and to what extent the FRC is meeting its obligations. Consideration should be given as to whether statutory powers should be addressed.
  • The FRC should consider the matter of audit market competition as a secondary objective and the main decision making and review of the audit market should be taken by the Competition and Markets Authority (CMA) in order to maintain the independence of the regulator.
  • It is recognised that the FRC has made some progress in widening the diversity of its Board, however these improvements must be extended throughout the organisation.
  • There are some key areas in which the FRC lacks the competence or experience to make decisions relating to specific regulatory functions and more could be done to increase the breadth of knowledge at an executive oversight level.
  • Transparency is key for mitigating conflicts of interest, but this issue extends beyond simply the Big Four audit firms and the review should consider the regulatory relationship between the firms and the professional bodies that regulate them, and the FRC as an independent regulator in order to secure independence from the profession and avoid criticism of conflict of interest.
  • Particularly with reference to the FRC as a public body the Review should also make note of the varying degree to which the Freedom of Information Act applies to the FRC and its functions and consider whether this should be standardised.
  • Transparency of decision making, especially for Conduct Committee business, is key for ensuring that trust is maintained in regulation. More should be done to ensure that Committees are more accountable for their decisions.
  • Serious consideration should be given to separating more definitely the standard setting arm and enforcement remit of the FRC.
  • As a long-term goal, the Review should explore the need for statutory legislation to underpin the independent regulation of the audit environment and consider whether this regulation should be extended beyond audit by ending the voluntary regulation of the accountancy profession and along with it a process of two-tier regulation.

David Potts, AIA Director of Operations, said: “The Independent Review of the FRC gives an opportunity to address concerns held by several stakeholders concerning the regulator’s performance and remit and should ensure that the public interest is protected. AIA strongly believes that transparency of audit regulation is key to ensuring trust for investors and the wider economy; the FRC must revolutionise its approach to avoid any criticism of ‘regulatory capture’.”

The Review

The Review is led by Sir John Kingman, who has extensive private and public-sector experience, supported by an advisory board.

The root and branch review will assess the FRC’s governance, impact and powers, to help ensure it is fit for the future.

The Review aims to make the FRC the best in class for corporate governance and transparency, while helping it fulfil its role of safeguarding the UK’s leading business environment.

The question for the Review is whether the current regulator, and the current regulatory structure, are as effective as they need to be in current circumstances and for the future. As well as reviewing the FRC, its structure, governance, powers and resourcing, this will include examining:

  • whether or not the FRC is, as was charged in the recent Select Committee report on Carillion, “chronically passive”, “timid” and requiring culture change;
  • whether or not it is too slow, insufficiently proactive, and whether its actions have sufficient deterrent effect; and
  • whether or not it is too close to, or unwilling sufficiently to challenge, the “big 4” audit firms – in a market in which there are well-documented structural competition weaknesses. Since, in practice, most consumers of accounts are in no position to apply direct pressure as customers, the need for an effective regulator of audit quality is fundamental.

The Review will aim to be evidence-based, rigorous and fair. But it will also be ambitious and, if necessary, far-reaching.

The Review will put forward proposals which aim to make the regulatory system as effective and credible as it needs to be – the “beacon” call for by the Government in the Review’s terms of reference.

No regulator can hope that every stakeholder will agree with all its decisions. But an effective regulator must be respect, and where necessary feared. The Review will aim to provide a platform for strengthened credibility, trust and respect.

The Review is due to report in the Winter of 2018.