FRC publishes proposal to reclaim powers to ban auditors

FRC publishes proposal to reclaim powers to ban auditors

But according to one expert, the industry response could render the move "redundant"

FRC publishes proposal to reclaim powers to ban auditors

The Financial Reporting Council (FRC) has published proposals to reclaim powers allowing it to register, restrict and remove licences from the auditors of the UK’s largest companies.

“Given the recent spotlight shone on audit quality, it would be fair to say the implementation of these measures by the FRC is unsurprising,” said Louise Aumann, lawyer and accountancy expert at law firm Reed Smith.

“Voices have grown pretty hoarse calling for the FRC to be entrusted with extra powers, so presumably the move has the support of political lobbies and business groups who have been calling for action for some time. I don’t think anyone could call this a bolt from the blue.”

However, Aumann adds that the response of the largest firms will determine if they ever “see the light of day”.

Power over registrations can be used to prohibit an auditor from working on audits for a specific sector if they are shown to have had problems in that area. This remit currently sits with four professional bodies for the accounting industry, termed by the FRC as Recognised Supervisory Bodies.

The reclamation of these powers is the latest in a series of steps to strengthen the FRC, catalysed by a string of government-backed reviews into the state of audit and corporate governance in the UK.

The reviews and subsequent consultations culminated in a major, “once in a generation” overhaul of the audit sector, which was unveiled via a government whitepaper in March 2021.

The UK government confirmed as part of the overhaul that the FRC should carry out the task of determining whether individuals and firms are eligible for appointment as statutory auditors of public interest entities (PIEs).

“Having direct responsibility for registering and monitoring PIE auditors will allow the FRC to act more quickly and effectively when systemic issues are identified in these audits,” the FRC said in a statement.

“This complements the FRC’s increasingly assertive supervisory approach and is a strong addition to our regulatory toolkit.”

The pending overhaul of the audit sector will also see the FRC become the Audit, Reporting and Governance Authority (ARGA) – a new and improved regulator put on statutory footing and equipped with stronger powers.

Unveiling its three-year plan and budget earlier this month, the FRC officially set out its plan to transition into the new regulator.

According to Aumann, this makes the timing of today’s consultation launch “interesting”, with the FRC’s transition into ARGA potentially rendering the move “redundant”.

Earlier this week, the FRC also published a new governance code for the auditors of PIEs and FTSE-350 companies. This “further strengthens the governance and independent oversight of the largest audit firms,” the FRC said in a statement.

The proposals are open to public consultation until May 26.

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