Link: FRC launch special report
Starting today, the body officially assumes responsibility for a far wider remit. Together with an injection of fresh blood, it is looking to move corporate governance up a notch, a revised agenda that some believe could leave financial directors quaking in their boots. There is good reason to believe it means business.
But Sir Bryan Nicholson, at the FRC’s helm since 2001, is blunt about the challenges ahead. ‘I think it’s a perfectly fair comment that if we cannot demonstrate that self regulation works, with certain statutory powers only to back it, then the next stage would be total statutory regulation,’ he says.
When it was set up in 1990 to deal with the scandals of the eighties, the government had decided that self-regulation was the best option. It is a strategy that Sir Bryan describes as highly successful ‘because the people in the system knew they had to make it work because of the alternative’.
But since Enron, Parmalat et al, the pressure’s on to up the ante. Enhancements include a new proactive approach to uncovering accounting cock-ups in the books of listed UK companies, with 300 sets of accounts slated for investigation by the Financial Reporting Review Panel (FRRP) this year.
Today also marks the official launch of three boards – in fact they joined the FRC at the end of 2003. The Professional Oversight Board of the Accountancy Profession (POBA) will oversee an independent audit inspection unit to monitor the audit of major listed companies and other public interest entities. It will also oversee the regulatory activities of the individual professional accountancy bodies, including education and training, standards, professional conduct and discipline.
The Auditing Practices Board (APB) plays a key part in the development of auditing and assurance services standards including ethical standards. Finally, the Accountancy Investigation and Discipline Board (AIDB) promises to offer an effective and transparent investigation and disciplinary scheme to handle public interest cases.
Sir Bryan’s overriding objective is to reverse the undermining of confidence among investors and the public at large following the Enron and WorldCom scandals. ‘Even though the UK was not directly implicated, there was a great deal of hostility to the profession, business and directors. None of that is good news from a business point of view.’
But with an annual budget of £12m – a mere drop in the ocean in Enron terms – Sir Bryan’s team have their work cut out for them. ‘Compared with the US Securities and Exchange Commission this is a very small budget, but this shows the value of a largely self-regulatory approach. It is not a lot to give assurance on financial reporting and corporate governance, but I feel I’ll absolutely be able to meet the objectives we’ve set.’
The largest percentage increase in cost is for the work of the FRRP as it makes the shift to proactive investigations. The panel, advised by the FSA and a risk advisory panel shortly to be announced, will decide which companies’ accounts will be placed under the FRC’s spotlight on a risk-based approach.
‘We’ve carried just over 70 investigations so far – we’re working up to speed, we’re learning as we go along and it’s interesting. Of the 70 we’ve looked up, there are 10 sets of accounts where we’re making further enquiries. It’s already having a positive effect.’
Compared to the armies of people staffing the SEC – at last count around 200 lawyers were on the payroll – you can’t help but wonder whether the FRC might have bitten off more than it can chew. Sir Bryan himself admits that delivering measurable targets is not without its challenges. ‘We’ve got to demonstrate that the whole is more powerful than the sum of the parts and that that system will give more certainty. That’s a critical deliverable. If we avoid unnecessary scandals and disagreements about how accounts look, and we’re not subject to media criticism that will be success.’
And with transparency supposedly high on the list of priorities (work progress, aims and objectives of the FRC’s five boards are already published on its website), Sir Bryan is happy to call the bluff of his critics.
Opening the body up to constant public scrutiny, he says, will only serve to drive success.
‘If knowledge is widely disseminated, and people have time to digest it and aren’t being forced to turn on a sixpence. Confidence doesn’t come from me writing a standard. It comes when all the companies follow the standard and investors are happy.
‘We have the tangible target of UK convergence with IAS – that’s an absolutely key deliverable. The first audit inspection review has to start in June. Behind the generalisations are a set of specific targets. I’m a great believer that you can’t manage it if you can’t measure it.’
In the meantime, Sir Bryan continues to shy away from a Sarbanes Oxley-style prescriptive approach. ‘One of business’s main concerns with statutory regulation is that it leads to a box-ticking approach.’ he says. ‘There will always be people who break the law, but a regulatory framework will reassure the public and the capital markets and restore confidence in the business and professional community. This is light touch, business-led regulation.’
Meanwhile, Sir Bryan for one is keen to downplay the leaner, meaner image that some have suggested will be key to success. ‘If you punch someone on the nose, they tend to take rather against you. I’m much more in the business of a self-regulatory framework and getting all parties to agree on how the bar is raised. Business has still got to be entrepreneurial, innovative and creative.’
Restoring confidence in the sector has greater longer-term implications than simply avoiding a UK Enron. Sir Bryan’s objectives also touch on ensuring that the future pipeline of quality entrants into the profession is maintained at a very high standard.
‘The UK profession has always had high standards. The US profession has suffered from the impact of scandals to a degree. Here, we’ve been very fortunate in the calibre of people who have chosen to go into the profession. It’s in all out interests to maintain that.’