Julia Irvine 27 Oct 2017 12:48pm

FRC chief responds to toothless watchdog criticisms

The Financial Reporting Council has defended its role as the UK’s audit regulator following its decision to close the investigation into KPMG’s audit of HBOS and mounting criticism that it is a toothless watchdog in bed with the profession

But FRC chief executive Stephen Hadrill’s fighting talk has already come in for questioning, with Alistair Osborne asking in The Times business leader column whether his speech on “lessons from the financial crisis” was meant to be satirical, given that the FRC had failed to investigate the audits of most of the UK banks that suffered, and the auditors of those that had been examined were cleared.

At an FRC audit update this week, Haddrill told his audience of auditors, investors, corporate governance experts and preparers that the ability of the FRC to investigate audits and bring auditors to book had been hampered, in part by the UK law prevailing before the EU Audit Regulation and Directive (ARD) was implemented last year, which had set the bar of the misconduct test too high.

However, now the ARD was enshrined in UK law, the threshold had been lowered and the regulator would be able to take enforcement action on the grounds that there had been a breach in the relevant requirements. This would go a long way towards meeting public expectations that “lesser inadequacies will be brought to book”.

It also meant, he added, that more potentially deficient audits would be investigated, prosecuted and ultimately sanctioned.

Another lesson the FRC had learnt from the financial crisis was that successful prosecutions and their sanctions had to be a genuine deterrent to poor performance for enforcement to be effective.

So tribunal fines had been increased, from hundreds of thousands of pounds a few years ago to in excess of £5m for some cases, and retired Court of Appeal judge Sir Christopher Clarke had been commissioned to consider whether the range of fines and sanctions was adequate “to safeguard the public interest and deter wrong-doing”.

The FRC had increased the strength of its legal team and, thanks to an overhaul of its processes, was now bringing cases to tribunal more quickly.

However, Hadrill noted that robust enforcement procedures and thorough investigations on their own were not enough to ensure public and stakeholder confidence in its work as a regulator.

“We must be more transparent by communicating our role and work in a way that is accessible to all of our stakeholders, including employees and the wider public.”

He pointed to the intended publication of a register of interests for all members of the FRC board and key decision-making committees to remove doubt about the objectivity of regulatory decisions.

Writing in The Times this morning, in a piece entitled “FRC’s flawed lesson”, Osborne pointed out that while Haddrill acknowledged the financial crisis had cost the UK £1.1trn in financial support for UK banks, he had failed to mention that “the FRC had cleared all the accountancy firms of any dodgy audits, most recently KPMG over HBOS”.

As for the FRC's record of innovation, he suggested that this must be “why [Hadrill] also admitted that one of the Big Four firms only produced a 'satisfactory' FTSE 350 audit 65% of the time”.

“Yes, KPMG as it happens.”

Earlier this week, Evening Standard City editor Anthony Hilton commented that the FRC is right “by its own measures” that corporate reporting has improved, “but the question it needs urgently to ask is whether these are the right measures”.

“If its objective is to restore trust in the system, but the public does not think it is measuring what is important, it is going to spend a lot of money making very little progress,” he said.

Meanwhile, as Haddrill revealed in his speech, the FRC will soon issue a paper revealing how it tackled the HBOS audit investigation and what it found.