Sir John Kingman, chair of UK Research and Innovation and chairman of Legal and General plc, will lead the inquiry, which is due to be completed by the end of 2018.
Business secretary Greg Clark said the UK has a “strong reputation” as a place to do business but, “This needs to be continuously updated and it’s important to ensure all of our regulators continue to drive high standards”.
He said the review aims to make the FRC the, “Best in class for corporate governance and transparency, while helping it fulfil its role of safeguarding the UK’s leading business environment”.
“This review is part of the government’s Industrial Strategy aim of creating a business environment that ensures our regulators are fit for the future and our markets are working for consumers,” added Clark.
Sir Win Bischoff, chair of the FRC, welcomed the announcement. “Meeting public expectations means using our powers effectively, working closely with other regulators and identifying where gaps in those powers exist.
“The review will ensure we are best placed to support UK efforts to attract investment in business for the long term.”
The FRC has come in for criticism recently for failing to spot trouble at Carillion. At a hearing in front of the BEIS and Work and Pensions Committees, MPs said the FRC had been “useless” when it came to Carillion and its auditors and was “toothless” and “ineffective” as a regulator.
Steven Haddrill, FRC chief executive, argued that its failure to act before it was too late was due to a historical lack of government interest in expanding FRC powers.
This month Haddrill said he wanted to expand auditors’ responsibilities, by requiring them to examine companies’ financial reports from “front to back”.
He also said that the Competition and Markets Authority should look into breaking up the Big Four by spinning off “audit only” firms in a bid to enhance competition.
In September last year, the FRC agreed to publish a new register of interests for all board members, committees and councils, following backlash against its decision in the HBOS/KPMG investigation.
The case caused outrage in the press, with commentators accusing the FRC of being weak because of the vested interests of former Big Four employees who work within its ranks.
The FRC now wants to be involved in the recruitment of potential candidates for senior positions at the largest accountancy firms and has increased possible fines for misconduct to £10m.