Financial Reporting Council

Given recent publicity around the Financial Reporting Council (FRC) and its high profile current investigations Shoosmiths regulatory partner John Hartley takes a closer look and what’s happening with its possible replacement – and why there’s a delay.

He writes:

In March this year it was announced that, the FRC needed to be urgently replaced and that the latest tongue twisting incarnation would be the Audit, Reporting and Governance Authority.

In fact such was the urgency that the government announced the replacement would be established before the end of the year. Sadly, no such announcement has been made.

The latest review of the FRC came after a select committee report into the collapse of Carillion highlighted glaring concerns and labelled the regulator as ineffective and passive with a reactive mindset too timid to make effective use of the existing powers. This followed earlier controversies including the HBOS investigation when it was revealed that a large number of senior investigators came from the top four accountancy practices – KPMG, PwC, Deloitte and EY. The FRC’s current case list is made up solely of referrals concerning these four firms.

It is suggested by some that the timidity stems from the close relationship between current FRC investigators and their former firms.

The FRC does have powers and we have seen large fines and sanctions being handed down but occasionally they have stopped short of pointing the finger. The new, incoming regulator will have the authority to go further than wrist slapping. We suspect that the greatest fear amongst the big four, and others, will be the threat of intervention and the ability to have a direct regulatory presence within the biggest of audit firms. We see also the continued theme of corporate accountability furthering recent developments of anti-bribery, money laundering and tax evasion in the corporate world.

These ‘urgent’ changes were to be made to protect the public from failing companies, identify early warning signs of significant failures and to increase confidence in the audit sector.

Perhaps a change in regulator might not save firms from collapse but it is clearly the government’s intention that a new regulatory framework will be able to help flag any serious failings surrounding struggling companies before it is too late.

It is unclear at this stage as to exactly when the new regulator will take over and indeed if it will take on the FRC’s existing caseload. What is clear is the distinct lack of urgency highlighted by the review last year.

John Hartley is a partner in the Business Crime and Regulatory Team at Shoosmiths.