The government’s proposals to revamp the Financial Reporting Council (FRC) are putting the cart before the horse when it comes to naming the replacement body according to ICAS.
With legislators, the media and much of the country distracted by the Conservative Party leadership race, it can be hard to remember all the other priorities on the regulatory agenda. So thanks are due to the Scottish accountancy institute for reminding us of proposed reforms to do away with the supine Financial Reporting Council and replace it with a gleaming new Audit, Reporting and Governance Authority (ARGA).
While it supports the overall concept, ICAS argued that the ARGA formula is the wrong way around when it comes to the symbolic ordering of its priorities and acronym.
“The name ARGA places audit, reporting and governance in the wrong sequence and distorts the natural order of the framework,” wrote ICAS executive director for standards, Michelle Mullen. “This might seem like a subtle point to make against the background of all the other regulatory reforms facing our profession, but ICAS firmly believes it is an important one and is in the public interest.”
Mullen argued that the current name overplays the importance of audit, which is not the primary component of the financial reporting system, “nor is it the most important”. Instead, ICAS plumped for names that better reflected the appropriate priorities of corporate governance, corporate reporting and audit, either the Governance, Reporting and Audit Authority (GRAA), or the Authority for Governance, Reporting and Audit (AGRA).
ICAS published its statement in response to the Department of Business Energy and Industrial Strategy (BEIS) consultation on recommendations from Sir John Kingman to scrap the FRC and replace it with an independent statutory regulator with “the interests of consumers of financial information, not producers” at its heart.
Rather than restricting its remit to qualified accountants, ARGA will take a more proactive role than the FRC and extend its jurisdiction to all chief executives, finance officers, chairs and audit committee chairs and enforce their obligations to certify the accuracy of the financial statements and effectiveness of internal controls.
The shift in emphasis is a significant one and is likely to increase the jeapordy for board members of organisations caught up in accounting scandals and corporate collapses such as Carillion, Patisserie Valerie and Arcadia.
The review was commissioned by the business secretary Greg Clark and while arrests resulting from the Patisserie Valerie signal need for improved corporate regulation in the UK, the likelihood that Clark will be around to see through his proposed reforms is low. Clark is a prominent ministerial supporter of Jeremy Hunt’s leadership campaign and would be lucky to hold onto his job should front-runner Boris Johnson become the next prime minister.
There is the small matter of Brexit to negotiate before anyone in Westminster or Whitehall has the capacity to concentrate on corporate governance and audit reform.