FRC prioritises audit inspections during ARGA transition
The government has made clear that the Financial Reporting Council (FRC) must prioritise inspection and enforcement activities during the overhaul of the regulator and restructure as the Auditing, Reporting and Governance Authority (ARGA)
16 Apr 2019
In an open letter to the outgoing head of the audit regulator, CEO Stephen Haddrill, the secretary of state for business, Greg Clark, has stressed that while the FRC is overhauled and replaced by a new regulatory body, the Auditing, Reporting and Governance Authority (ARGA), it must continue its current inspection programme and also focus on whether audit firms are correctly applying audit standards in relation to fraud.
This follows the recommendations in Sir John Kingman’s independent review of the FRC, which will see the disbandment of the current audit regulatory body and the departure of a number of senior staff, including Haddrill.
In his letter, Clark points out that the government has accepted the recommendation to form the new Auditing, Reporting and Governance Authority (ARGA) body and is currently consulting on its operation and remit.
Clark said: ‘It will require a programme of transformation for the FRC to transition into the new statutory regulator. While some of the changes will require legislation, many aspects of transformation can and should be undertaken or initiated in advance of legislation.’
The FRC is committed to a smooth transition, but expressed concerns about current staffing levels to deal with the workload. Haddrill said that ongoing work on planning for Brexit and the FRC’s review of corporate reporting needs means that the regulator needs to recruit additional senior staff. He describes recruitment on this scale and quality as a challenge and suggests the FRC should be offered more 'flexibility' in how it goes about this.
The government has set a number of key priorities for the FRC over the next 12 months during the transitional period in order to kick start the new approach.
Clark said: ‘Trust in the sector has been damaged by recent failures. Whilst these reflect a minority of companies and audits, it is important that when standards and requirements are not met, specific and thematic concerns must be dealt with, including through continued cooperation with other regulators.
‘Action may also be needed to ensure that auditors understand the expectations on them.
‘Inspection and enforcement should therefore remain clear priorities for the FRC. Following recent evidence given to the BEIS select committee by audit firms, I would encourage the FRC to take steps to ensure that audit firms are correctly applying audit standards in relation to fraud.’
The FRC will also continue to set auditing and ethical standards and to monitor and enforce audit quality in its role as the competent authority for statutory audit in the UK, as well as its work on the UK corporate governance code. It should continue to monitor and take action to promote the quality of corporate reporting, including operating independent enforcement arrangements for accountants and actuaries as well as providing some oversight, by arrangement, of those professions' membership bodies' regulation of their members.
In his response to Clark, FRC CEO Stephen Haddrill said the regulator would ‘do our utmost to implement the transition to the new authority as effectively as possible.’
Haddrill’s letter stated: ‘We recognise the importance of close working between the FRC, the Department, the CMA and Sir Donald Brydon to enable you to create a coherent plan to address the future of audit and address market weaknesses.
‘At the same time, we will address the need for auditors to do more work now to assess whether companies are a going concern and to address the risk of fraud.’
Report by Pat Sweet, additional reporting Sara White