The FRC: all bark and no bite
The FRC's lack of gumption means its future is doomed
All bark and no biteThe FRC’s Choice in the UK Audit Market report is a damp
squib. The FRC claims to be developing ‘market-led’ solutions. Yet ‘markets’
encourage monopolies and as a result the audit market is dominated by relatively
few major firms. They are unlikely to relinquish any major clients or revenues
without regulatory action.
A variety of policies could promote competition. These include a break-up of
the Big Four firms, limits on the number of FTSE 500 companies that any one firm
can audit, compulsory rotation of audit firms, periodic retendering, joint
audits and inviting new players into the audit market.
Banks, insurance and other companies, and even the Financial Services
Authority could be invited to audit specific sectors. The FRC, perhaps fearing
opposition from the big firms, has opted for a quieter life, but its silence on
audit quality issues seems to be all too deafening.
The FRC’s lack of vision is also evident on corporate governance issues. Its
recent press release claimed that the combined code ‘is working reasonably well
and there is no need for major changes at present’.
Earlier in the year, Grant Thornton reported that 66% of the FTSE 350
companies were not fully compliant with the code. Non-executive directors,
backed by the FRC, have failed to curb ‘fat-cattery’. The gender pay gap
persists and workers from ethnic minorities still face high unemployment and low
pay.
Income inequalities have widened and many workers’ pension rights have been
eroded. Major companies have been running cartels and tax avoidance schemes to
boost profits and executive remuneration.
In 1998, George Soros said that ‘international business is generally the main
source of corruption’. Global bribery and corruption is estimated to be running
at $2 trillion (£0.96 trillion) each year and global money laundering is
estimated to be around $2.5 trillion. Britain is a major laundry and regulators
point the finger at accountants, corporate structures and secrecy.
Prosecutions and fines have raised questions about the quality of corporate
earnings, governance and accounting disclosures. Yet the FRC can’t spot any
problems.
The FRC is too close to corporate interests to provide effective independent
regulation or meaningful thought leadership. How long before the politicians
realise this too?
Prem Sikka is a professor of accounting at University of
Essex