The Financial Reporting Council (FRC) has published its strategy for 2021/22 after a period of consultation in which respondents expressed broad support for the FRC’s progress towards the new Audit, Reporting and Governance Authority (ARGA)
In 2021/22 the FRC expects its overall costs to increase by £6.1m, almost half of which funds the organisation’s development as it prepares to transition to the ARGA, and half will cover the costs of setting up the UK Endorsement Board (UKEB) which is responsible for international accounting standards following the UK’s exit from the EU.
Overall, the combined budgeted cost of the FRC and the UK Endorsement Board will increase by 13.5% to £51.5m (2020/21: £45.4m). The number of employees will increase by 16% to 417 by March 2022 (budgeted March 2021 headcount: 358). The rise in the number of employees will see staffing costs increase from £27.4m to £34m.
The regulator has also set aside £2m to fund new supervision oversight powers over audit firms.
There will also be a 16.1% increase in funding from the preparers levy from the profession, which will require an increase of 23% in the rates applied. The FRC said this was ‘partly due to the drop in FTSE market capitalisation from the previous year following the effects of Covid-19. As in previous years we will continue to raise £0.9m for the IFRS Foundation alongside our levies’.
The FRC’s plan takes into account the government’s stated intentions for the statutory objectives and governance of ARGA and its proposals to fund the new regulator through a statutory levy. It also takes further steps towards the growth that will be required to deliver new or enhanced regulatory activities.
Although the legislative timetable to set up ARGA is to be confirmed with the government hinting at April 2023, the FRC said it had ‘established a well defined transformation programme to address the 155 recommendations of the three independent (audit) reviews. We have already implemented 34 and during 2021/22 the programme will focus on implementing those remaining recommendations not requiring legislation, many of which have already become embedded in our “business as usual” activities’.
From the budgeted headcount of 358 at the end of this financial year, the FRC plans to grow to 417 by March 2022, with some further growth budgeted in 2022/23 in supervision in particular.
The extension of FRC powers will see a growing demand for additional resources. The strategy report stated: ‘As we consider how best to allocate new resource required to deliver new functions and transformation activities, we anticipate scaling up first in our regulatory standards division, to support the creation of new frameworks, standards, codes and guidance.
‘Increases in the size and scope of our supervision and enforcement divisions will follow, but will be dependent on the outcome of government consultation and legislation. Until the government’s public policy position is clearer, we cannot accurately estimate how much further growth in supervision and enforcement is required, but it will be significant.
‘We have deferred this growth until at least 2022/23 and the government’s propositions are clearer, and we will consult in next year’s plan and budget.’
The objectives and work programme set out in the strategy reflect the FRC’s continued commitment to serve the public interest and deliver the existing responsibilities whilst also modernising and moving towards becoming ARGA – by early adoption of new functions and enhanced organisational resilience. As part of the process, and reflecting feedback to the consultation, FRC will develop for publication a three-year forward plan and further measures to report the progress and impact of its strategy.
The FRC’s core objectives are:
- to set high standards in corporate governance and stewardship, corporate reporting, auditing and actuarial work, and assess the effectiveness of the application of those standards, enforcing them proportionately where it is in the public interest.
- to promote improvements and innovation in the areas for which we are responsible, exploring good practice with a wide range of stakeholders.
- to influence the development of international standards, including for climate and wider environmental social governance (ESG) reporting by engaging in the global regulatory and standard setting communities, to ensure that they are informed by stakeholder demands for high quality, consistent and comparable information that is robustly assured.
- to promote a more resilient audit market.
- to transform the organisation into a new robust and independent regulator, acting in the public interest.
Sir Jon Thompson, CEO FRC said: “The FRC’s intention is to create an organisation which is ready to become ARGA as soon as the legislation permits, whilst becoming increasingly effective and resilient. We are pleased with the government proposals and are in close contact with them to manage the next stages of the reform process following the period of consultation.”