FRC in a ‘poor state’ ahead of three-year planby
A dramatic realigning of the accounting and audit landscape awaits under new leadership of the Financial Reporting Council during its twilight years. The incoming chairman has promised more enforcement cases and a sharper regulator, but also less red tape for businesses in the post-Brexit era.
The UK accounting regulator is to open more enforcement cases and increase its budget as it transitions to the new regulatory watchdog, with the man tipped to lead the new body promising to build bridges with the industry.
The Financial Reporting Council’s (FRC) draft three-year plan details its strategy and priorities ahead of its transformation into the Audit, Reporting and Governance Authority (ARGA), which is expected to begin operating from 2023.
By 2025, the regulator expects to grow its headcount by 17% to employ more than 500 staff, and its budget is likely to top £70m as it gears for a period of turbulence across the UK economy.
“Our plan also incorporates change to accommodate increased volumes of specific activities, such as enforcement cases, which we expect to rise in future years due to a combination of our increased remit and other external factors such as economic stresses on companies,” the FRC said in its report.
Structural changes to the top of the audit market would also fall on the ARGA’s plate, including proposals to cap the number of audits Big Four firms can perform.
Presently, the audit regulator is in a “pretty poor state”, according to the government's candidate to chair the organisation, Sir Jan du Plessis.
On Tuesday, the City stalwart told MPs on the Business, Energy and Industrial Strategy Committee that the organisation’s governance was “really not good enough” given its lack of leadership, as he laid out his intentions to steer the FRC through the transition.
“They haven’t had a permanent chair for goodness knows how long, they’ve got three non-executive directors. It’s really not the way to run the regulator that should be setting the tone for the whole of British business,” he said.
The government is currently mulling the full range of powers to grant the ARGA, prompted by a series of corporate scandals involving big name auditors that have shaken confidence in the profession.
The FRC itself has faced criticism from industry figures who have branded it “toothless” in the wake of collapses such as outsourcer Carillion and retailer BHS. In July, the FRC had 49 open investigations during the fiscal year ended March 31, a rise of 16.7% compared with the prior fiscal year. It handed financial sanctions of £16.7m, for its most recent fiscal year, up 1.2% from the prior period.
Four divisions inside the FRC, regulatory standards, supervision, enforcement and corporate services, will expand over the next three years to cover the widened regulatory remit, the report said. Meanwhile new duties include monitoring of climate-change disclosures at the largest UK companies, and new audit enforcement processes.
For the year ending 31 March, 2023, its budget will have grown 17% to £60.6m, with funds going towards the UK Endorsement Board, an independent accounting body, whose costs are expected to increase by 53.3% to £4.6m as it gears up into full operation. The body was formed by the government last year to rubber stamp international accounting rules after Brexit. The EU previously endorsed these standards for the UK.
“Our three-year plan will build on our approach so far and we will continue to strengthen our corporate services support during the period of growth—from recruitment and training, to finance systems and risk management,” Jonathan Thompson, chief executive of the FRC, said in a statement.
In remarks to MPs, Sir Jan was scathing in his view of the present FRC governance, and said it was his priority to bring about major change.
“I think perhaps for somebody in my position it is not wise to comment on what might have gone on before,” he told MPs “But I have to say the governance situation at the FRC today is in a pretty poor state.
“So, I don’t know why it’s happened, I’m not sure what the background is, I’d prefer not to comment, but I think it’s really not good enough,” he said. “And if I’m given the opportunity to take on the chair of the FRC I promise you that one of the first things I’ll do is to address the governance at the top of the organisation.”
Outgoing FRC chief executive Sir John Thompson admitted the FRC had been “asleep at the wheel” as accounting scandals including Patisserie Valerie and Thomas Cook piled up.
Sir Jan said there had been “real progress in a number of critical areas” under Sir Jon, but much of the good work had not entirely filtered through to the public, which he would try to change.
“I want to start the job immediately, because it’s sad for me to see an organisation that is obviously needing a chair and needing other directors to take it forward,” he said. “I think within two or three months we’ll have an organisation that is much better equipped to make decisions and to present itself to its external stakeholders as being in a good shape.”
‘Get in line, or else’
One crumb for the accounting sector is Sir Jan’s plan to not create “avoidable costs” for businesses if possible.
“I have no doubt that ultimately businesses create wealth and organisations like the FRC spend money,” he said. “So we need to look after the wealth creators. And not just wealth creators, but the people who create jobs, employment and take society forward.
“So I think the last thing the FRC should be doing is to impose red tape costs and complications for organisations, in particular small organisations. No doubt about it.”
On the Big Four firms Deloitte, EY, KPMG and PwC, Sir Jan warned: “I hope they realise that unless they play their part in creating a different regime, the outcome could be much worse for them.”