FRRP declares war on suspect accounting

In the past, the Financial Reporting Review Panel (FRRP) was not viewed by financial directors as a great threat. Sure, it had teeth, but only if someone lodged a complaint.

All that is now changing. Instead of waiting for problems to land on their doorstep, the FRRP is now actively digging out serious problems within company accounts, and senior FDs will have to face up to the consequences.

For a start, the FRRP’s scrutiny will no longer be confined to the top end of the market, and it will proactively focus on specific industries. But the panel is now able to take a more robust attitude, as it is on the lookout for what is going wrong.

‘If companies follow the rules of the game, they won’t have a problem,’ says Ian Brindle, former chairman of PricewaterhouseCoopers and current FRRP deputy chairman. ‘We will be looking at people who are bending the rules and struggling to meet profit forecasts, and who may be tempted to twist it a bit,’ he says.

MG Rover (pictured) is one such company under the spotlight. Accountancy Age reported last week that staff have been looking into the company’s accounts, but no formal investigation has begun.

For the first time this year, the FRRP will be able to examine interim announcements. Its power to do so comes from legislation enacted last year and a ‘memorandum of understanding’ announced in April with the Financial Services Authority.

Organisations with listing responsibilities, but which fell outside the Companies Act (such as building societies) and additional areas of financial reporting (such as interim reporting), will now come under the FRRP’s scrutiny.

Interims are seen as a fruitful place to look for reporting aberrations. ‘It may be that important issues are poorly or briefly described when companies ought to have taken a bit more care,’ says Brindle.

The second, and rather more ominous, agreement is expected to be with the Inland Revenue. The word is that the Revenue has been in touch with the FRRP, pointing out that there are a lot of issues worth exploring in the accounts of subsidiaries.

Discreet messages have been sent from the Revenue to the auditor community, via the FRRP, saying these problems should be sorted out. FDs would be well advised to put in some time making sure all is crystal clear ahead of any future scrutiny.

Last year, the FRRP targeted revenue recognition as an issue of concern, and was startled by what it found. ‘We were surprised at the paucity of some of the accounting policy notes, which gave little indication of how things had been calculated,’ explains Brindle.

After talking to the companies, the FRRP found that often notes to the accounts had remained the same while serious changes in accounting policy had in fact taken place.

‘These things tend to get rather boilerplate,’ says Brindle. ‘Companies copy them out from the previous year without thinking. Some large household names were a bit sloppy on that. As a result, you will see changes.’

This sort of thing, which larger companies would like to give the impression simply never happens, has changed the view of the FRRP in dealing with their responsibilities.

Further down the corporate standings, for companies outside the FTSE100, the FRRP has already realised it needs to up the ante.

‘We were surprised at the lack of understanding of the rules when you get to companies that are not near top-level,’ says Ron Paterson, one-time technical chief at Ernst & Young, who has served on the panel for almost eight years. ‘They rely too much on their auditors and, again the auditors themselves may not understand the issues fully.’

Part of this is the increasing complexity of accounting standards, which become ever more an area of specialised knowledge. Certainly, this year’s switch to IFRS will provoke more than a few FRRP enquiries.

But part of it, as FRRP members suggest, is down to attitude. Increasingly, this attitude is going to be tested. Companies and FDs are going to receive many more enquiries from the FRRP for information.

Companies and FDs need to learn how to deal with such enquiries and handle them in such a way that they stay routine. The last thing anyone should do is ruffle feathers at the FRRP.

‘Some large companies have given us a “piss off” answer, but then have contradicted what they said in their accounts and have given us a new avenue for enquiry,’ says Brindle.

The impact of the FRRP’s sea change in its processes has yet to be felt. ‘For a FTSE350 company,’ says Hughes, ‘there is a fairly good prospect that their accounts will go through serious scrutiny.’ FDs, as ever, will need to be on their toes.

This is an edited extract of an article that first appeared in the May issue of our sister magazine, Financial Director.