Audit review head warns of reform ‘drift’

Sir John Kingman, who led a highly critical review of the operations of the Financial Reporting Council (FRC) has hit out at the government over its failure to include any reference to the legislation needed for reform of the audit regulator in this week’s Queen’s Speech

In a letter to the business, energy and industry strategy select committee, Kingman stated that ‘given the unequivocal consensus around the need for change, I am concerned about the risks of letting the FRC drift on, half-reformed and lacking the teeth that only legislation can give it.’

The independent Kingman review, published in December 2018, was scathing in its criticism of the FRC, describing it as a ‘ramshackled house, cobbled together’. Among the faults identified were a lack of powers, an informal approach to board appointments, and an ‘inconsistent and incomplete approach to managing conflicts’.

Kingman called for called for the standard setter and audit regulator to be closed in with immediate replacement by a new oversight authority with regulatory powers set in statute.

In March this year, the government agreed to establish Auditing, Reporting and Governance Authority (ARGA) as the FRC’s replacement, with a new mandate, new leadership and stronger statutory powers such as those to direct changes to accounts to be made, rather than applying to court to do so.

However, there is no reference to audit regulation or any legislative changes in the area of audit reform in the Queen’s Speech, which sets out the government’s programme for the year.

Kingman’s letter acknowledges that since the review was published, ‘significant progress has been made, both by the regulator and the government’. This includes appointing former HRMC CEO Jon Thompson as the new chief executive of the FRC, as well as what he calls ‘good progress in implementing quite a number of the review’s detailed non-legislative recommendations.’

He then goes on to state: ‘The final, crucial piece of the jigsaw, however, is legislation to put the new regulator onto a proper statutory base – and to give it the powers it needs to do its job.

‘It is therefore disappointing that this legislation was not included in Monday’s Queen’s Speech.’

The BEIS select committee has also published a letter from business secretary Andrea Leadsom, sent earlier in October, in response to a number of queries raised by MPs.  

On the question of the Kingman review, Leadsom states: ‘Numerous steps have already been taken that will support a change in culture at the FRC - reinforcing the expectations and organisational structure of a public body in relation to managing public money transparency, governance, confidentiality, lT security and the development of diversity policy and practices in accordance with the public sector equality duty.

‘Where legislation is required, as with reform to the audit market, the government remains committed to legislating as soon as Parliamentary time allows. That includes on measures to hold company directors to account in relation to their duties in preparing and approving reports and accounts, in addition to auditors and accountants.’
Leadsom’s letter also said the government is ‘looking to make rapid progress’ in its response to the initial consultation on the Competition and Market Authority recommendations for the audit market, but has not yet set a date for publishing a response.

Kingman’s letter to the BEIS committee is here.

Leadsom’s letter to the BEIS committee is here.

By Pat Sweet

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