FRC numbers speak louder than words

by Rose Orlik

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13 Jul 2011

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THE FINANCIAL REPORTING COUNCIL is preparing for its biggest strategic review since Enron; last week saw the publication of its 2010-11 annual report but does it hold clues to the future of the regulator?

There are no stand-out numbers to guide the reader: most areas of activity saw a gentle increase in spending and funding with no obvious spikes to indicate favoured boards or those facing the chop.

The FRC stayed comfortably on budget in all areas – you'd expect little else from a crowd of accountants – but one area did show significant increases in funding and costs.

Discipline on top

The Accountancy and Actuarial Disciplinary Board's operating expenditure rose markedly and its staff count swelled by one-third. Accountancy case outgoings rose by £0.7m to £2.4m – the largest cash increase of any activity area – and even the actuaries have been busy, with discipline case costs doubling from £0.2m to £0.4m between 2009-10 and 2010-11.

Anna Colban, secretary to the AADB, said the spike represents "a significant increase in our caseload over the past few years". The body's outgoings also depend on what stage proceedings have reached – tribunals can be hugely expensive while cases that drag on also gobble cash.

A disciplinary crackdown might be behind the spike in activity; the AADB takes on work both of its own volition and through referrals from participating bodies such as institutes. With more jobs on the table, it could be argued that the profession has been sensitised to disciplinary issues and greater importance is placed on the board's work within the FRC.

Colban questioned this, saying the trend is partly a function of economic cycles and the recent contraction: "When things start going wrong, that's when problems come out of the woodwork; it's hardly surprising that our caseload has climbed."

AADB chairman Cameron Scott also denied that the increase in activity was as a result of greater emphasis within the FRC, saying the growth is organic and adding "perhaps we're just getting better at finding cases".

Look to the future

Chairman Baroness Hogg has spoken firmly of the need to "improve our own effectiveness by streamlining the FRC". From now on, the regulator will focus on two key strands: setting codes and standards and the conduct of companies and professionals.

It is hardly surprising, therefore, that the AADB continues to barrel on with its work, presumably safe in the knowledge that it dovetails neatly with one of the regulator's surviving priorities.

The numbers do not paint so simple a picture, though. The Professional Oversight Board, charged with overseeing institutes' regulation of auditors and incorporating the Audit Inspection Unit, is one of the few bodies that saw its budget and spending fall. From outgoings of £1.4m in 2009-10, its budget slipped to £1.3m and actual expenditure retreated further to £1.1m while staff numbers stayed below the budgeted allocation.

The Accounting Standards Board and Auditing Practices Board also spent less year on year, by £0.2m and £0.1m respectively.

For the ASB, an erosion of its position might seem a foregone conclusion, given that most major economies have signed up to International Financial Reporting Standards and its global counterpart, the IASB, is gearing up for its final hurdle: convergence with US GAAP. However, this does not seem to fit with one of the FRC's remaining objectives, "the setting of codes and standards", meaning chief executive Stephen Haddrill (pictured) could yet have some surprises in store.

The APB might fear for its future seeing as its primary focus – boosting audit quality and public confidence therein – is arguably covered by a host of stakeholders including institutes and other boards within the FRC.

Staff in the dark

Further complicating the issue, one FRC insider says that even those "close to the centre" have no idea what's in store. Internally, the regulator's future is "a matter of pure conjecture" and discussions are "very hush-hush". "I don't think anyone knows what Haddrill has in mind, even those who are right on the inside," they conclude.

Staff have produced manifold reports and recommendations on the FRC's future, but those close to the matter say that, ultimately, the decision is out of their hands: "Some people are in a horrible position. They are working their hardest, day to day, with an axe hanging over their head." The final decision will be taken at ministerial level and staff might not know whether or not to start scanning the classifieds until it is too late.

With the numbers remaining resolutely neutral, it would be a leap of faith to conclude that boards for which spending is falling – overseers and standard setters the APB, ASB and POB – are for the chop. At the same time, it is undeniable that disciplinary cases have leapt, potentially benefiting from sharper awareness honed by the economic shock of 2008-09.

Crystal-ball gazing

However, the numbers do fit with educated guesses about the future of the FRC. Its stated objectives – setting codes and standards and companies' and professionals' conduct – are safely neutral. In an environment of overlapping regulation within the FRC and from institutes, this area could be a good place to start scaling back. Such a move might also find favour with the institutes that resent the regulator stepping on their toes and demanding increased funding for the privilege.

At the same time, while code and standard setting remains a priority, it would be logical to see the latter tail off as the IASB supersedes its UK equivalent. The most recent ASB release dealt with FRS 29, the financial instrument standard, being brought into line with its global equivalent IFRS 7 – hardly groundbreaking stuff. The FRC is stronger on codes, having released the UK Stewardship Code and a Corporate Governance code in the past year. Could it be, therefore, that "code and standard setting" is just a matter of semantics and the FRC's real focus will be on codes?

The next few months should provide the answers as the regulator focuses on the business of streamlining and boosting efficiency. Those working on the review might have their own ideas about how the finished product should look but it seems only Haddrill knows for sure. And he is not telling.

Financial reporting council boards

AADB cases

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