Chartered Institute of Internal Auditors calls for ‘radical change’ at Financial Reporting Council

6 Aug 2018

The Chartered Institute of Internal Auditors has today published its submission to the Independent Review of the Financial Reporting Council in which it has called for radical change based on a package of reforms designed to make the UK’s audit regulator more effective.

Following the collapse of Carillion earlier this year, which led to scathing criticism of the Financial Reporting Council (FRC) by a joint select committee inquiry, the government appointed Sir John Kingman to undertake an independent review, which is now underway. As part of the review, there has been a call for evidence and the deadline for responses is today (Monday 6th of August).

Dr Ian Peters MBE, Chief Executive of the Chartered Institute of Internal Auditors said: “The devastating collapse of Carillion earlier this year raised important questions about whether the audit regulator is fit for purpose, the Government was therefore right to establish an independent review. If the FRC is to be effective going forwards it is essential we use this review as a launch pad to make radical change to the way it operates. Reform must include renewed objectives that make its purpose clearer, coupled with new powers to ensure it has the teeth to do its job properly. If we are to avoid more Carillions in the future it is fundamental we have an audit regulator that is best in class for corporate governance.”

Key reforms contained within the submission include the following:

Change to mission and objectives

The current scope of the FRC is too broad, too high level and its mission and objectives need to be clearer. The FRC would benefit from a sharper focus; achieving clarity on the purpose of the FRC should result in increased effectiveness.

It is important to clarify the mission, focus and core functions of the FRC. We suggest “promote high standards of corporate governance, transparency and accountability in public interest entities”.

As set out in the review call to evidence document the FRC currently has a number of core and non-core functions. We are saying that to make the FRC more effective it should essentially lose its non-core functions, so it can focus on and prioritise its core functions i.e. those that are most important.

A new name to better reflect its purpose

The FRC’s name should be changed to better reflect its new mission and focus. We suggest changing the name to “Regulator of Standards in Corporate Governance”

New powers to ensure it has the necessary teeth to do its job properly

We believe the FRC would be more effective with new powers.

We recommend that the responsibility of the UK Listing Authority (UKLA) should be moved from the remit of the FCA and given to the FRC. This would help the FRC to pick up on potential issues early on.

The FRC also requires the ability to effectively sanction directors for misconduct. Currently, the FRC only has the power to sanction chartered accountants. However, it is not appropriate that chartered accountants should have a different set of sanctions to directors who are not chartered accountants given the joint and several responsibilities of directors.

For this reason, the Chartered IIA advocates that the FRC should have a range of sanctions available, including disqualification, which may be applied to directors in respect of accountancy and transparency failings. These should be a statutory power.

A more proactive approach

At present there is a perception that the FRC only investigates a company once a failure has occurred.

To help address this we suggest the FRC should adopt a more proactive approach to its regulatory strategy and tactics in order to increase the avoidance of harm.

In support of this if the UKLA moves to the FRC as proposed, this would enable the FRC to proactively approach companies when they notice a number of risk indicators being flagged.

Another idea would be to allocate a specific supervisor (as the FCA currently do), to companies that are systemically important. This would mean an external auditor would have to approach their FRC supervisor if they believe an organisation to be in trouble, allowing for an early warning system.

Putting the FRC on a statutory footing

Government should legislate and put the FRC on a statutory footing with its new mission, objectives, powers and sanctions included in the legislation. The legislation should include that the FRC is not an arm of Government, but an independent regulator of corporate governance, accountability and transparency. Essentially, the relationship should be similar to that of the FCA and government – with the FRC reporting and being accountable to the department for Business, Energy and Industrial Strategy.