Audit regulator ramps up investigations with 13% budget hike

The Financial Reporting Council (FRC) is significantly beefing up its oversight and supervisory functions, recruiting 100 additional staff to improve the quality of its enforcement activity

The regulator is in limbo as it is waiting for the government to introduce legislation to restructure the body as the new Audit, Reporting and Governance Authority (ARGA) but it has to set budgets for 2020/21, ahead of its transition to a new regulatory body with a broader remit and stronger powers.

The annual budget will increase from £41.7m to £47.2m (13.2%) and the number of people from 255 (March 2020) to 355 by the end of March 2021.

The regulator is proposing to increase the preparers levy rate by 18% to generate an extra £2m towards the proposed funding requirement.

The FRC has to maintain its investigations activity, despite the delay in the ARGA transition.

The plan is to speed up the investigation and conclusion of enforcement cases by increasing the number of lawyers and forensic accountants, and strengthening its case examination function to fast-track decisions on whether to open an enforcement case.

To improve coverage, the number of audit quality and corporate reporting reviews is set to increase by 25%, while audit firm monitoring will be expanded from the Big Four to include mid-tier firms.

According to its draft plan for 2020/21, the FRC plans to increase the scope and number of audit quality reviews from 130 in 2019/20 to between 145-165 in 2020/21, and corporate reporting reviews from 215 in 2019/20 to between 240 and 260 in 2020/21).

 It also states that in 2020 it will ‘conclude our Carillion related factual investigations and decide upon any enforcement action required’.

The independent Kingman review of the FRC and the Competition and Markets Authority (CMA) review of the audit market heavily criticised the regulator for its failures to take action on audit disasters, including highlighting the fact the FRC did not question accounting practices at Carillion in the months ahead of the outsourcer’s eventual collapse.

The latest changes are designed to streamline the FRC’s decision making processes ahead of wider legislative reform, with a major recruitment drive to increase staff numbers with 100 hires in the enforcement team, bringing total staff numbers to 355.

The FRC will increase its oversight of recognised supervisory bodies for audit and begin to taken on responsibility for decision-making about auditor registration. It is to revise its business model and reorganise into four divisions: regulatory standards and codes; supervision; enforcement; and corporate services.

Sir Jonathan Thompson, FRC CEO, said: ‘Ahead of the FRC’s transition into the Audit, Reporting and Governance Authority (ARGA) I am determined we use our powers to the fullest, to respond to corporate governance challenges.

‘The failure of a major company has significant impact, not just for investors, but for employees and communities.

‘The public has a major interest in the health of companies which is why we plan to serve that public interest by using our powers to the fullest within our existing regulatory scope.’

The regulator is also broadening its stated purpose which is to serve the public interest by setting high standards of corporate governance and by holding to account those responsible for meeting them.

Last autumn the senior management team was overhauled with the appointment of Sir Jon Thompson, ex head of HMRC, as chief executive, replacing Stephen Haddrill, while a new chair Simon Dingemans was brought in in a bid to restore trust in the regulator.

The FRC draft plan and budget 2020/21 consultation closes on 28 February 2020.

By Pat Sweet, additional reporting Sara White

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