The government announced this month that they would be acting on the recommendations made by Sir John Kingman’s review of the Financial Reporting Council (FRC).
Under those recommendations, the FRC will be replaced by ARGA. The review also suggested that the new regulator should have the authority to intervene in company accounts, and to be able to force companies to pay for it to investigate shareholders’ concerns about corporate governance.
The IoD welcomed most of the recommendations made by the Kingman report, and said in their letter that the overall replacement of the FRC was a necessary move.
However, the IoD argued that the proposals could hinder the deliberate degree of flexibility in the UK’s corporate governance code.
As an alternative, the IoD suggested that the government should set up a new commission – similar to the system in Germany – that would monitor corporate governance.
“We doubt this kind of inclusive ‘soft law’ regulatory philosophy will be a good fit with the proposed new audit regulator”, the IoD wrote.
“Our fear is that the current imperative of toughening up audit market regulation could have the unintended consequence of pushing the broader UK corporate governance framework towards a more legalistic, US-style regulatory approach with limited scope for flexibility”.
They wrote, “Despite the failures we have seen at specific companies, which have undoubtedly tarnished the image of business more broadly, UK corporate governance as a whole still represents a source of competitive advantage for us. At this pivotal time for the country, any source of advantage must be fiercely protected”.
Dr Roger Barker, head of corporate governance at the IoD, said, “Corporate governance has been swallowed up within a regulator that now urgently needs to focus its energies on improving the legitimacy of statutory audit.
“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”.
A spokesman for the IoD expressed their alarm that the well-respected UK corporate governance structure might be undermined. “It’s a huge competitive advantage for the UK at the moment – we can’t risk throwing that away.
“We need to take corporate governance more seriously, but this kind of regulation won’t stop bad actors in the industry. Bad human behaviour will always exist – that’s an auditing issue, not a corporate governance issue.
“They explained that at the moment, corporate governance is treated as though it complements audit: but actually, the IoD’s spokesman argued, “it’s the other way around. Corporate governance is the overarching issue,” they added.
Parts of the Kingman Review are currently out for a consultation period that will last for 10 more weeks.