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Raymond Doherty 8 Aug 2018 10:46am

Scope and culture of FRC questioned by stakeholders

The Financial Reporting Council needs to overhaul its culture and reform its remit, as it receives mixed messages from the profession

This week saw the first batch of submissions to the Kingman Review, which was launched by the government in April following growing criticism over the FRC’s failure to spot trouble at Carillion.

The Department for Business, Energy & Industrial Strategy (BEIS) which set up the review, wanted to hear several themes, including the FRC’s role and purpose, effectiveness and its powers, potential role in preventing corporate failure, legal status and relationship with the government, and governance and leadership.

ICAEW said it wants the FRC to be “reformed and retained”. Vernon Soare, chief operating officer at ICAEW, said, “In a post-Brexit world, the UK must be seen as a great place to invest and to do business. A part of this will be a regulator of global standing, which can deliver confidence, both international and domestic, in the UK’s standards for corporate governance, auditing and accounting.

“ICAEW believes the FRC could fulfil that role. But it will need a tighter remit from government, defined boundaries, strengthened powers and a tireless commitment to drive improvement,” he added.

The Association of Accounting Technicians (AAT) said that a numbers of its recent and most high profile investigations, including HBOS and BHS, showed that the FRC is not effective.

It says that it wants the regulator to remain but that it needs “meaningful” reform of both its “culture and outlook” before being granted any extra powers.

The AAT flagged up what it said were “valid concerns” about the closeness of the FRC to the Big Four, “not least because its senior ranks are comprised of several former employees of the Big Four”.

It also noted that the director responsible for the FRC at BEIS is married to FRC chief executive Stephen Haddrill.

“Irrespective of whether conflict here is merely perceived or real, the fact both claimed this is not a conflict of interest shows a lack of awareness as to how much damage such incidences cause the FRC reputationally,” the AAT added.

The Chartered Institute of Internal Auditors (CIIA) said the scope of the FRC is “too broad, too high level and its mission and objectives need to be clearer”.

The FRC should be stripped of "non-core" functions such as regulating the accountancy profession in order to better focus on "core" tasks such as corporate governance, it said.

The Institute of Directors (IoD) argued for the opposite. It suggested that an independent Corporate Governance Commission should be established to oversee the UK’s corporate governance framework, enabling the FRC to better focus on its “core task of improving company audits”.

The IoD said that recent corporate failures have highlighted the need for a fundamental review of the purpose of the statutory audit and how it is overseen by the regulator.

Roger Barker, head of corporate governance at the IoD, said, “There must be a clear distinction between being robust on audit quality, while continuing to nurture the UK’s much admired principles-based corporate governance regime.

“There are strong arguments for bolstering its investigative and enforcement powers over statutory audit. However, corporate governance and investor stewardship are qualitatively different areas of regulatory activity. They benefit from a much more flexible and collaborative approach,” he said.

The FRC said it looks forward to seeing Kingman’s recommendations once he has completed his review and that it would be inappropriate to comment on individual submissions.
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