The Financial Reporting Council’s release of its three-year plan has been welcomed by auditors and accountants, but some argue it highlights the “overdue” shake-up of UK audit and corporate governance
The Financial Reporting Council’s (FRC) clarification of its plan to transition into the Audit, Reporting and Governance Authority (ARGA) will hold little weight until a final package of audit reforms is announced by the UK government, market participants have said.
“The fact remains that until the government issues its response to the audit whitepaper it published over a year ago, and until it commits to passing the legislation required to put the audit regulator on a statutory footing with the legal powers it needs to do its job effectively, then the audit regulator will remain limited in what it can do,” said Gavin Hayes, head of policy and external affairs at the Chartered Institute of Internal Auditors (CIIA).
Unveiling its three-year plan and budget on April 5, 2022, the FRC officially set out its plan to transition into the new and improved audit regulator ARGA.
Conceived as a core part of the UK government’s proposals to overhaul audit and corporate governance, the new watchdog is intended to be put on statutory footing and given stronger powers.
Taking this into account, the plan considers how, and when, the FRC will need to increase its capacity to adapt to its new powers and responsibilities. It comprises a breakdown of intended expenditure for the coming financial year, in addition to a summary of expected costs and headcount for the following two years.
“Given that it has now been over four years since Carillion collapsed and over three years since Sir John Kingman’s review of the FRC, the need for action is overdue,” Hayes continued, adding that time must be found to pass legislation in the next parliamentary session.
Marking the one-year anniversary of the proposals on March 18, 2022, the CIIA wrote to the Prime Minister urging the government to ensure that it includes an audit reform bill in the Queen’s Speech in May.
Hayes’ reservations are echoed by Michael Izza, CEO of the Institute for Chartered Accountants in England and Wales (ICAEW), who noted that while it’s “helpful” to see the FRC set out its stall, this fails to mitigate the overdue audit reforms, he said.
“More than four years on from Carillion, we are still waiting to see the legislative proposals that will underpin the new regulator.
“The need to modernise corporate governance and audit was urgent then – it is even more so now.”
But for Maggie McGhee, executive director of strategy and governance at the Association for Chartered Certified Accountants (ACCA), the plan’s major shortcoming comes in the form of cost and expenditure.
“The plan sets out areas of spend but it lacks detail on why the spend is necessary, what risks it’s aiming to mitigate against, and what value it will deliver,” she said.
McGhee made reference to the plan’s proposed increase in funding from the Consultative Committee of Accountancy Bodies (CCAB), of which ACCA is a member. The CCAB’s contribution should increase from £9.7m to £11.9m, the plan states.
“ACCA believes the proposed increase will disproportionately fall on smaller audit firms and the SMEs they serve,” McGhee said.
“This means that smaller audit firms and smaller businesses will be subsidising the regulation of larger audit firms and public interest entities, which moves away from the ‘polluter pays’ principle.”
In addition to intended expenditure, expected costs and headcount, the FRC’s plan also sets out a series of key areas in which it intends to achieve “regulation in the public interest”.
These include setting high standards and assessing the effectiveness of their application; promoting improvements and innovation; influencing international standards; promoting a more resilient audit market through greater competition; and transforming the FRC into a new “robust, independent, and high-performing” regulator.
“In the three years since Sir John Kingman’s review of the FRC, we have made significant progress implementing those recommendations within our power to ensure better outcomes for stakeholders who rely on high-quality audit, reporting and corporate governance,” said FRC CEO Sir Jon Thompson in a statement.
“As we continue to lay the groundwork for ARGA it is pleasing to see the continued level of support from our stakeholders for the FRC’s current plan.”
The plan goes on to include several key statistics regarding the FRC’s forthcoming initiatives. For instance, the number of people employed by the regulator will increase by 16.5% by March 2023, it says.
It also says that it will increase resources for regulatory standards by 25%, and resources for enforcement by 13%.
Despite her criticism of aspects of the plan, McGhee has praised the overall sentiment of the FRC’s proposals.
“ACCA supports the FRC’s efforts to transition into ARGA to better serve the public interest.
“We also support the FRC’s core objectives which aim to achieve its broad public interest purpose and to build trust and to achieve better outcomes for all stakeholders.”
