This is long overdue. At the Local Authority Pension Fund Forum we have argued for many years that the FRC is weak, slow to act and too close to the big accountancy firms it is meant to regulate.
It is encouraging that Sir John has included scrapping the FRC altogether in his remit. After meeting him I was reassured that he was open to recommending fundamental change. In our response to Sir John’s review we have set out clear proposals that would split the FRC’s functions to create clarity and help restore confidence in the system.
The FRC cannot be reworked because it has incompatible responsibilities. It is in charge of standard setting and enforcement for the accounting profession. This conflicted dual role builds in no incentive for the enforcer to criticise standards to correct a failure.
The FRC is also responsible for setting the “comply or explain” corporate governance and stewardship codes. This role is at odds with that of a government-designated regulator dealing with standards and enforcement whose message should be “comply or else”.
The current position is a legacy of the FRC styling itself as a “market-led” body when in law and reality it was always a public body.
We can see this incoherence in the FRC’s mission statement which says: “We promote the strength and trustworthiness of the UK’s corporate sector and capital markets internationally to help the UK remain a magnet for global capital.”
A regulator’s job is to enforce not promote – a lesson learnt when the Financial Services Authority’s weakness was exposed in the financial crisis.
If the FRC needs breaking up, how should it be done? First, the replacement bodies should be set up on a statutory basis so that they operate according to the law instead of making up their own remit as the FRC has done.
For guidance on how standards should be set, the US has regulators with functionally accurate names that have avoided the risks the UK has been prone to in recent years. Accounting standards for directors and accounts should be set by a free-standing accounting standards board akin to the US Financial Accounting Standards Board. Its objective should be to set standards that conform to company law and capital markets law.
Auditing standards should be separately regulated by a UK version of the US Public Company Accounting Oversight Board, which oversees audits, auditors and standards.
A separate consultation may be needed to decide where the governance code should sit. A simple option is to establish an Australian-style corporate governance council.
The public interest lies in stopping failed audits. To restore confidence in the system, the government should establish a new companies commission to investigate and punish breaches of company law by auditors and directors.
The commission’s job would be to deal with audit failures to demonstrably achieve justice and enable the system to be corrected. It should also inspect accounts, a function currently delegated to the FRC. Like the Competition and Markets Authority it would attract independent, experienced staff and would not be dominated by members of the profession it is meant to regulate.
An independent companies commission with a clear remit would align investigations of directors and auditors, removing self-regulation of auditors from professional bodies. It would instil the necessary fear in companies and their auditors and reassure the public that the UK takes company accounts seriously.
At its heart Sir John’s review goes beyond a debate about accountancy and how to arrange government agencies. It is about holding company directors and their auditors to account and making sure the regulator can withstand powerful lobby interests.
Carillion and the other recent accounting scandals have shown that when companies fail, workers, pensioners, suppliers and taxpayers pay the heaviest price.
Breaking up the FRC and establishing a companies commission with clout will help prevent further collapses, strengthen Britain’s companies and protect us all from failed directors and auditors.
Cllr Ian Greenwood is chair of the Local Authority Pension Fund Forum, which represents £230bn of local government pension fund assets.