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FRC prepares to say goodbye with series of reforms

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The UK’s Corporate Governance Code will get its first refresh in several years, while sustainability reporting rules will tighten under the final set of reforms proposed by the existing accounting regulator.

14th Jul 2022
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The Financial Reporting Council (FRC), the outgoing UK accounting watchdog, has outlined a series of reforms to raise standards in boardrooms prior to its transformation into a new regulatory authority with more power to punish misconduct.

A paper accompanying the announcement disclosed plans to update existing codes, strengthen sustainability reporting standards, and overhaul the UK Corporate Governance Code ahead of government legislation.

Over the coming three years, the FRC will transition to the Audit, Reporting and Governance Authority (ARGA), with the responsibility of regulating the accounting and audit industries. The new body will have extra legal powers to intervene when it identifies wrongdoing or competition issues, and more resources to supervise and enforce standards.

The FRC’s final set of proposals are “largely in line” with the government’s plans to overhaul the audit sector, said Selina Sagayam, a partner at Gibson Dunn & Crutcher UK. 

Efforts to “simplify” reporting requirements will likely also be welcomed by both corporates and stakeholders, as Sagayam said that businesses “have grown tired with the ever-increasing weight of the burden of compliance” with new reporting rules.

History of errors

A series of high-profile accounting blunders and scandals involving big name companies such as Thomas Cook, BHS, Carillion and Patisserie Valerie led UK lawmakers to promise drastic action in a bid to improve the quality of auditing. 

Several overlapping reviews of the sectors suggested a range of outcomes from deliberately breaking up large firms to forcing joint audits on companies. The FRC’s inability to rein in misconduct, effectively punish poor auditing or raise standards made it a target for both public and government anger. 

The collapse of Carillion and mismanagement of its pension scheme particularly rankled, as Big Four accounting firms were described by MPs as “feasting on what was soon to become a carcass” of the government outsourcer, having bilked it for multiple millions in the years leading to its collapse.

Cementing its demise, government figures branded the FRC “feeble and timid” in its response to the Carillion liquidation. However, delays caused by multiple government changes, Brexit and the pandemic slowed progress, while lobbyists continued to chip away at the initially wide-ranging reforms.

Long-awaited reforms 

In May, a watered-down plan for audit reform featured in the Queen’s Speech list of the forthcoming legislation to go before Parliament, with a bill drawn up including details of the ARGA’s formation and remit. 

Reaction from industry was muted, with many commentators angry at the government’s perceived rowing back of promises to act tough.

“These changes have been a long time coming and many will be frustrated by the lack of commitment by the government to bring forward the Audit Reform Bill during this Parliament,” said Sarah Lunn of Osborne Clarke. “However, now that the government's plans have been published, businesses can begin to prepare for the changes.”

With the bill starting its journey through Parliament, the FRC has now laid out its final aims prior to the transition, proposing more stringent sustainability reporting requirements and tightened rules for company directors on the signing off of company accounts. The FRC plans to “simplify” reporting requirements, while ensuring standards remain high, it said. 

The proposals now require primary legislation to be approved by the government in order to enter law. 

Once-in-a-generation opportunity

“These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting,” said FRC’s CEO, Sir Jon Thompson. “While we await government legislation, the FRC is pressing ahead with those changes to standards and codes that will improve and enhance the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA.”

One notable omission from the government’s initial reform plan is a new rule to make company directors personally liable for internal controls over financial reporting, similarly to the US Sarbanes-Oxley Act. It was dropped in favour of a tougher corporate governance code. Thompson had labelled it a “missed opportunity” in a previous statement.

“Making changes to existing codes, standards, and guidance will be a complex process, but it’s vital that we tighten internal controls and modernise corporate governance,” said Michael Izza, chief executive of the Institute for Chartered Accountants in England and Wales (ICAEW). 

The FRC should be praised for the timely publication of the new paper, Izza said, as it adds “welcome clarity” to the regulation of important issues at a time of further government flux.

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By ireallyshouldknowthisbut
14th Jul 2022 14:54

FRC seems to have done its job, or at least the one the lobbyists have paid handsomely for.

Keep its eyes shut, and hold their hands over their ears and let the money flow through the city whilst giving a pantomime of occasional regulatory activity.

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Replying to ireallyshouldknowthisbut:
Tom Herbert
By Tom Herbert
14th Jul 2022 15:45

I'm sure I saw 'pantomime of occasional regulatory activity' when I was in Vegas - what a show!

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Replying to TomHerbert:
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By Hugo Fair
14th Jul 2022 22:07

Was that before or after viewing the 'Circus of Avoidance' as put on by the SFO?
One of the reviews said "I've never seen so much ducking & diving - it's terrifying"!

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