FRC overhaul sees plan to hire 80 staff as budget increases

The Financial Reporting Council (FRC) is to increase its budget significantly in 2019/20 to £37.8m and plans to hire additional staff to improve its oversight and monitoring of audit firms, and support its transition to a new regulatory body

The FRC will increase its annual budget to £37.8m in 2019/20, up significantly year on year from actual reported £28.6m spending in 2018/19. Core operating costs have been set at £32.4m, an increase of 14% compared to £28.4m in 2018/19. This means that some of the annual charges will rise, with the levies on CCAB member professional institutes, including ICAEW, ACCA and ICAS, going up from £4.1m to £4.4m.

The overhaul of the regulator over the next 12 months, as a result of the wide-ranging and highly critical Kingman review into the FRC, will see the hiring of 80 additional staff to strengthen enforcement activities and expand audit governance activities. Nearly half of the additional funding will be spent on staffing, resulting in a £4.1m rise in staff costs to £24.1m.  The regulator currently employs 210 staff. 

The new hires and expansion of the monitoring team is critical if the FRC is to meet its key objectives to improve audit quality, strengthen enforcement activities, and promote the quality of corporate reporting, governance and investor stewardship.

One of the priorities for financial year 2019/20, outlined in the FRC's published plan and budget, will be to manage the transition into a new regulatory body, the Audit, Reporting and Governance Authority (ARGA).

Over the last year, the regulator has been heavily criticised over its failures to act quickly to deal with audit failures, with a slow reaction to the collapse of Carillion when it took weeks to announce an investigation, despite early warnings that the outsourcing giant was facing financial difficulties several months before it collapsed. This has raised ongoing concerns about the independence of the regulator and its enforcement capabilities, leading to the government's decision, following the Kingman review in December 2018, to disband the FRC in its current guise.

During 2018/19 some long-running FRC investigations were also concluded after years of investigation and financial penalties nearly doubled in the last 12 months to £23.3m [2016/17: £12m]. Over this period, FRC issued five severe reprimands and five reprimands were to audit partners and firms.

The worst performing firm was KPMG, which was given several multimillion pound fines as historic audit performance was once again flagged over misconduct in relation to audits of financial statements. The Big Four firm was given over £12m in sanctions with a £6m penalty related to the audit of Equity Syndicate Management Ltd, £4m over the 2009 audit of Co-operative Bank plc and £2.1m over Ted Baker plc audits. There was also a £4m penalty for Grant Thornton over the audits of Nichols plc and the University of Salford, and a £750,000 fine for former Baker Tilly auditors over a Tanfield Group audit dating from 2007.

Funding for the annual audit quality review programme will be given a £1.3m injection, increasing from £8.4m to £9.7m as part of the FRC’s efforts to improve oversight of the quality of audit work at firms. There will also be a hike in the budget for audit firm monitoring and supervision, from a negligible £100,000 spent in 2018/19 to a budgeted £1.2m for the next 12 months. The FRC estimates that it will spend £5m on audit and accountancy case costs as the number of investigations increases, up substantially from £100,000 spent in 2018/19.

Reacting to criticism, the FRC plans to publish its first enforcement report detailing sanctions activity. This will provide an overview of enforcement activities and FRC priorities going forward. The first report will be for the year to 31 March 2019 and will be aimed at improving the transparency of the regulator’s operations and improving understanding of the schemes and procedures.

Against a background of the ongoing BEIS consultation on 48 recommendations from the Kingman review into the future of the FRC, which will see an overhaul of the regulator subject to legislative changes, the independent Brydon Review into the quality and effectiveness of audit, and the Competition and Markets Authority review into audit competition, the FRC has been forced to plan a major programme of reform.

This will also see current chief executive officer Stephen Haddrill stepping down from his role, although a date for his departure has not been set. The government and the regulator are currently recruiting a replacement. Meantime, chairman Sir Win Bischoff has also stated that he will relinquish his role.

Stephen Haddrill, CEO of the FRC, said: ‘The FRC’s plan sets out a clear pathway towards the establishment of an enhanced authority, with stronger powers and greater resources, as quickly and effectively as possible.

‘Ahead of full implementation of the Kingman proposals, the FRC will do all in its power to promote transparency and integrity in business, and improve audit quality, corporate governance and investor stewardship.’

The FRC’s strategic priorities for 2019/20 include making the immediate changes that the government has requested to the scope of its regulatory procedures; and to introduce them ahead of the legislation to establish ARGA.

These include expanding the FRC’s work on the quality of that part of an audit conducted overseas, preparing to extend the scope of reviews of corporate reports to cover the whole annual report, and broadening its work on oversight of the accountancy profession.

In the plan, the FRC says it has been asked by the government to consult on some specific changes to the regulatory framework that do not require legislation, with a view to making the changes following consultation and during the transition to ARGA. These include whether the FRC should reclaim the approval and registration of audit firms conducting public interest audits, and the sanctions that should be applied under a new, centralised approval and registration regime.

In line with the recommendations of the independent review, the FRC is preparing voluntarily to apply Freedom of Information provisions to all its work prior to formal designation as a public authority.

It has also adopted new procedures on conflicts of interests and procurement, and instituted new arrangements for handling and reporting on complaints.

The plan also states that in 2019/20, the FRC will take forward the recommendation of the independent review to publish anonymised reports of its inspections. The government will work with the FRC to develop an appropriate way forward for publishing the full reports. The FRC specifically states that this will include a detailed update on one its more contentious investigations, concerning the collapse of government outsourcer Carillion.

From 2019/20 the FRC will introduce ongoing monitoring of the recognised supervisory bodies (RSB’s) enforcement arrangements (complaints and discipline) to assess whether the RSBs’ policies and procedures are effective in carrying out this delegated function. This replaces in-depth reviews once every two to three years.

The FRC, which has been criticised for the length of its investigations, says it will assess its performance against the published key performance indicators (KPI) of a maximum of two years from the start of an investigation and service of proposed formal complaint or initial investigation report and will consider other evidence of the impact of its enforcement activities.

The minimum annual levy has also been confirmed at £1,116, with subsequent fees based on market capitalisation, starting at £10.95 per £m of market capitalisation. This equates to £558 for UK AIM companies with £100m market cap, £3,465 for private companies with £750m turnover, and £41,989 for premium listed companies with £10bn market cap.

FRC Plan and Budget 2019/20

By Sara White, Pat Sweet

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