Government scraps FRC in favour of more powerful regulator
The government has backed the Kingman Review’s call to scrap the FRC and replace it with a new, enhanced accounting regulator.
The coup de grace has been on the cards for a while now. The Financial Reporting Council (FRC) has been under fire from all sides for its cosy relationship with the audit industry and its seeming inability to halt major collapses.
The new regulator, known as the Audit, Reporting and Governance Authority (ARGA), will have a new mandate, new leadership and stronger powers clearly outlined in law. Recruitment for the new chair, deputy chair and CEO will begin shortly.
The ARGA was one of the Kingman Review’s landmark proposals, unveiled in December last year as part of Sir John Kingman’s “root and branch” review of the FRC. The review was commissioned by the business secretary Greg Clark after the collapse of Carillion and BHS.
Kingman offered a brutal assessment of the FRC’s capabilities when he unveiled his findings last year. “I talk about [the FRC] as a rather ramshackle house cobbled together with all sorts of extensions over time.
“The house is just serviceable up to a point but it leaks and creaks sometimes badly. The inhabitants in the house sort of patch and mend but in the end the house is built on weak foundations and we need to build a new house.”
The time had come, Kingman concluded, for the FRC to be “replaced with a new organisation with new leadership, new mission, new powers and new funding”.
The ARGA’s more muscular powers include the ability to make direct changes to accounts rather than having to apply to a court to do so, make use of a wider range of sanctions in cases of corporate failure and publish reports into a company’s conduct and management.
Among the biggest changes backed by the government is giving the new regulator the power to investigate company directors. Currently the FRC can only investigate company directors if they are also registered with an accounting body.
In total, the government has said it will take 48 of the Kingman Review’s recommendations forward with immediate effect. The rest, the government said, will require greater consideration and, in certain cases, primary legislation.
Nestled among the recommendations on ice for now is a proposal for a strengthened framework around internal controls in the UK, reminiscent of the Sarbanes-Oxley regime in the US.
This is a big one for finance directors and CFOs. Sarbanes-Oxley requires company directors (which usually means the finance leader) to certify that their accounts do not contain misrepresentations or untrue statements. If misrepresentations are found, the directors are subject to big fines or prison terms if they do.
A government consultation on all of the proposals will remain open until June.