One in seven accounts faces FRC scrutiny

Link: FRC launch special report

Ten of the 70 proactive investigations conducted by the FRC’s Financial Reporting Review Panel have resulted in letters being sent to companies asking for clarification on aspects of their accounts. As part of the regulator’s expanded remit, it has set itself the target of looking into 300 sets of accounts over the next year.

But Carol Page, director of panel operations at the FRRP, said the high rate of follow-ups may not mean that any of the companies, whose identities remain secret during investigation, have irregularities in their accounts.

She added that the decision over whether to investigate further would be made once responses to the letters had been received.

FRC chairman Sir Bryan Nicholson this week admitted that the regulator’s new powers, which come into force today, effectively mark the last chance for self regulation to prove itself workable for the accounting industry.

‘If we cannot demonstrate that self regulation with certain statutory powers works, then the next stage would be totally statutory regulation,’ Sir Bryan said.

He added that he was certain the FRC would succeed in restoring the confidence to the investor and professional communities that has received a battering since the accounting scandals at Enron, WorldCom and Parmalat.

The move to conduct proactive investigations marks a huge shift for the FRC, which previously relied on tip-offs and complaints to initiate investigations into company accounts. From now on, the FRRP, advised by the FSA, will compose a list of companies to be probed over the forthcoming year using a risk-based system.

Such a system is still being finalised, according to Page, with the first batch of accounts identified using ‘a more judgmental approach than we might use in the future’.

Susannah Haan, legal adviser at the CBI, said that the change in the body’s approach was likely to alter the relationship between companies and the FRC. ‘It’s a significant shift in emphasis. The danger will be in terms of what businesses’ expectations are. The SEC had hundreds of people look at accounts and Enron still happened.

‘There will be scandals – it’s the nature of capitalism – and you cannot legislate to remove the possibility of failure, but people see the need for increased confidence in accounts.’

Despite the FRRP’s increased activity, it still has little power if a company proves uncooperative. Its main course of action is to take a company to court to force them to restate their accounts. It has the power to issue press notices to make the company’s name public.

The names of the accountants involved can also be forwarded to the relevant institutes, which could result in further investigations and punishment.

In more serious cases, where there could be an economic impact or action may need to be taken against the board of directors, the FSA may get involved.

The FRRP has no powers to levy fines itself.