Auditors to be hit with increased FRC levy demands as government funding ends

AUDITORS are set to be hit with increased levy demands from the profession’s watchdog as the government cuts all funding to the Financial Reporting Council (FRC) from 2016.

Since 2009, when the government pumped in £2.7m into the FRC’s coffers, it has progressively withdrawn its contribution and will stop providing direct contributions from next year.

Currently, it contributes just £250,000 – half the figure from the previous two years.

The funding gap comes at a time when the regulator is being tasked with doing more on less money, an irony not lost on Stephen Haddrill, FRC CFO. He told Accountancy Age that the government “have salami sliced it down – there’s not much to go”.

Indeed, the FRC has previously gone cap in hand to the profession and increased the amount sought through levy contributions as it grapples with increased costs associated with its audit work.

Adding value

But Haddrill remains optimistic that the wider profession recognises that FRC is being required to expand its work as result of new EU audit legislation and not “just a bid by us to do more work”.

“I think the test will be that the FRC pursues this extra work in a way that the profession sees as adding value in terms of the quality of its own work and the confidence investors have in audit,” Haddrill said.

“The two drivers of that extra work is the Competition Commission (now the Competition & Markets Authority) has asked us to review all FTSE 350 audits at least once every five years and we’ll have to do a bit more than that as we take a risk-based approach to choosing which audits we take a look at, so if something looks a bit strange in the middle of that period we might end up doing it twice – that’s been driven by the Competition Commission rather than the EC.

“Secondly the EU expanded really quite significantly the number of public interest entities – and we have to review all auditors of those entities and that increases the number of audit firms we look at from single figures – around eight or nine to about 50 – a big increase.”

The FRC intends to consult the relevant accountancy bodies and major audit firms, on the ways and amounts needed to secure additional contributions to fund its expanded remit and plug the funding gap caused by the government.

The shortfall emerged as the FRC announced its 2016/19 strategy outlining its priorities for the next three years.

Change of emphasis

The FRC has lofty ambitions for the quality of UK auditing, to make the most of its new role as the Single Competent Authority for audit under new EU legislation.

A key aim is that by 2019 at least 90% of FTSE 350 audits will need no more than limited improvements as assessed by the FRC’s monitoring programme. It will also work in collaboration with the profession to give assurance and confidence to investors globally.

“The FRC’s goal is to ensure reporting and audit in the UK are world leading and provide assurance to global investors to support UK businesses and growth,” said Haddrill. “The strategy for 2013/16 was informed by lessons from the financial crisis. There was a need to take robust action to restore confidence among the general public and in particular investors.

“In our 2016/19 strategy, there is a change of emphasis. We will work with investors, businesses, professionals and professional bodies to ensure the changes already made are successful in securing the highest quality in reporting and governance.”

Sign of confidence 

Another aspect of its three year vision is that the profession’s institutes will take the monitoring mantle back from the FRC – reviewing the audit work outside of the public interest entities such as in relation to charities and pension funds.

“I hope they see it as sign of confidence in their ability to undertake such work,” explained Haddrill “and on the disciplinary side I suspect the balance of work between us and the institutes will remain much the same.”

And the FRC has now ironed out a potential conflict that previously arose.

“The Competition Commission said we should have a competition objective and our concern was that we could get into a situation where our principle legal or statutory requirement to promote audit quality could run contrary to a competition objective.

“But then the EU legislation came along and that gave us a requirement to report to the EU on the state of competition in the UK market. We have now told the Competition Commission that now we will be following the EU legislation. We’d like to see more competition and will do what we can to promote it.”

With many mid-tier and smaller accountancy practices not entering the listed audit market or even exiting the audit sphere entirely, primarily over what are deemed to be restrictive and prohibitive financial and regulatory hurdles, Hadrill said he would be concerned if changes to the legislation now coming in, “led to a number of firms wanting give up public entity audit”.

He said the FRC wants to help create “a healthy and vibrant market” and would do what it is required to do under the legislation “but in a proportionate way” so that it recognises that “some of the firms will be quite a bit smaller than the ones we have dealt with in the past”, but they “feel the badge of being able to say they are subject to independent regulation is worth more than the cost of complying.”

“We are trying as a regulator to help people meet these standards and improve”.