Julia Irvine 8 Sep 2017 11:23am

Concerns growing over FRC's status

The Financial Reporting Council has conceded defeat in its three-year battle to remain outside government and is currently negotiating with the Department of Business, Energy and Industrial Strategy (BEIS) over its operational independence

The decision has major implications for the accountancy, audit and actuarial professions that the FRC regulates. It will also affect the UK’s listed and public interest companies, which are required to follow the corporate governance code.

Three years ago, the Office for National Statistics recommended the FRC should be classified as a non-departmental public body for the purposes of its treatment in the national accounts. But such a classification brings with it restrictions, such as having to get Treasury approval for paying staff on more than the prime minister earns (approximately £150,000).

The FRC had hoped to persuade BEIS to reclassify it as a public non-financial corporation, which would have given it more leeway and less departmental oversight. However, in May this year both BEIS and the Treasury rejected the suggestion and external solicitors advised the FRC that there was “no scope to challenge the current classification or to seek reclassification”.

According to the minutes to the FRC’s May board meeting, the board noted that accepting the 2014 decision would allow the FRC’s executive team “to focus on securing the best position possible in terms of our operational independence”. It also discussed the impact the classification would have on “the retention of fines, operations, staff and the role of the board”.

The board then agreed to accept the situation and work with BEIS on the way forward. It is also in discussions with the Treasury over the issue of fines imposed on firms and members of the professions it regulates.

In a statement, the FRC said, “The FRC has been classified as a public sector organisation and we are working with BEIS, as our sponsoring department, to identify and ensure that we meet the requirements arising from the classification.”

Although the change will not affect the way the FRC operates initially, it does raise questions about how it will impact on the quality of the regulator in the future. For example, the Treasury’s role in determining the number of staff the FRC can take on in future and the size of salary they can be paid could undermine the FRC’s ability to attract accountants and lawyers with the right depth of experience.

BEIS is currently responsible for approving the appointment of the FRC’s chair and deputy chair but this is likely to be extended to cover board members and the executive team, which could bring it into conflict with the Treasury with the FRC being caught in between.

There is also an issue over who has the responsibility for auditing the FRC. It is currently audited by mid-tier firm haysmacintyre, but as a public body the role is likely to fall to the National Audit Office. This could prove awkward, as the FRC is currently responsible for carrying out quality inspections of the NAO.

Another potentially contentious area relates to the retention of fines. In future, instead of returning fines to the recognised supervisory bodies (RSBs), such as ICAEW, the FRC will get to keep them – thereby becoming not just inspector, investigator and prosecutor, but also acquiring a significant interest in the outcome.

This will also prove costly for the RSBs. While they will continue to get costs back, what they currently receive back including fines doesn’t cover everything. As ICAEW points out, for every £4m it spends in costs, it only gets back approximately £3m.

The FRC was not prepared to comment on the issue beyond pointing out, “the audit legislation that came into force in 2016 directs where fines resulting from action under the Audit Enforcement Procedure should be paid. We are working with government and the recognised supervisory bodies on the details.”

Tim Bush, head of governance and financial analysis at investor lobby group PIRC, thinks the regulator is conflicted. “The current structure isn’t suitable for several reasons. Setting rules and enforcing them too is a major conflict. That breaks from any concept of separation of powers. Then there are problems with its own governance.”

With concern growing in the profession and across the business community, the FRC could be in for a rocky ride as it makes the transition.