ICAEW wants FRC reformed for ‘post-Brexit’ world

The Financial Reporting Council (FRC) needs significant changes in its governance, powers, culture and ways of working if it is to operate successfully in the post-Brexit landscape, ICAEW has made clear in its response to the current review of the regulator conducted by Sir John Kingman

The institute says many of the questions posed in the consultation document point to an analysis of past performance by the FRC, whereas given the changes that Brexit will create in the corporate landscape, the ICAEW says the key issue to address is ‘what kind of FRC do we need, to assist the UK economy to prosper in future?’.

While the ICAEW believes the FRC is the right body to represent the UK’s interests and to promote international regulatory and investor confidence in accounting, auditing and corporate governance, it says the regulator will need to adapt substantially in order to fulfil this forward-looking role.

The ICAEW response states: ‘Central to that perception will be a regulator of global standing: with a clearly-understood remit, excellent political, market and professional insight and a reputation for acting proportionately and with integrity and agility.’

The updating of the FRC’s remit to cover corporate governance, financial reporting and public interest entity audit might well call for a change to its title, but ICAEW says this should be balanced against the substantial equity which exists internationally in its current name and brand.

To better equip it to undertake its primary responsibility, the ICAEW says the FRC should include a new ‘Corporate Governance Office’ or similar, with a specific mandate to monitor and improve technical, ethical and other standards in corporate governance, and powers to hold to account all directors of unitary boards - not just members of professional accountancy bodies - in public and large private companies and public interest entities. Its activities would include certification and monitoring of the directors.

The ICAEW is opposed to suggestions that the remit of the FRC should continue to include public sector audit, actuarial standards and the monitoring and oversight of non-audit activities of the professional accountancy bodies. It argues that these functions do not align with the FRC’s future role of promoting confidence in the UK corporate sector and would distract it from its core objectives.

Responsibilities for monitoring local public sector audit work in England could be passed to the local public audit recognised supervisory bodies (RSBs), while ICAEW recommends discussion with the Institute and Faculty of Actuaries about a solution with a public interest oversight mechanism.

The emphasis on public interest entities (PIEs) which has characterised the FRC in the past should be balanced with an ability to understand and address the interests of the SME and small and medium practice (SMP) sector.

ICAEW also wants to see the creation of an ‘Audit Improvement Office’ within the FRC would give focus to the desired outcomes from this aspect of the regulator’s work.

ICAEW’s view is that the current slow speed of investigations is not symptomatic of FRC timidity but in part a reflection on the nature of the legal processes involved and complexity of the cases. It wants to see the inclusion of statistics on number of cases concluded in a year, and length of time to conclude cases, which it says would act as a gauge of effectiveness and a measure of staff quality and competence.

The institute says legislation is required to put the FRC on a more stable footing but adds that if the FRC remains as an arm’s length body of a government department, the application of public sector recruitment and remuneration policies and practices must not constrain its ability to attract very high quality talent with the necessary technical expertise and professional credibility.

On the issue of staffing, ICAEW says the FRC needs to do more to counter claims of conflicts of interest, and also highlights the relatively large number of non-executive directors the FRC utilises and their pay, which appears to be above comparable market levels.

ICAEW says the FRC’s objectives should include having regard to the impact its decisions may have on competition in the audit market and the extent to which its actions may encourage or discourage current and future firms and partners from wanting to lead on public interest entity audits.

On the issue of sanctions, ICAEW is in favour of more emphasis on sanctions to forge an improvement rather than fear culture and says the sanction of expulsion from membership of the respective professional should be limited to dishonesty or lack of integrity.

Vernon Soare, ICAEW chief operation officer, said: ‘In a post-Brexit world, the UK must be seen as a great place to invest and to do business. A part of this will be a regulator of global standing, which can deliver confidence, both international and domestic, in the UK’s standards for corporate governance, auditing and accounting.

‘ICAEW believes the FRC could fulfil that role. But it will need a tighter remit from government, defined boundaries, strengthened powers and a tireless commitment to drive improvement. We hope the Kingman Review will recommend that the FRC is reformed and retained.’

ICAEW’s response to the consultation is here

Report by Pat Sweet

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