The Debate: A new accounting role for the FSA

If it aint brokeBy John Cridland

Should the Financial Services Authority accept responsibility for investigating company accounts from the Financial Reporting Review Panel?

It’s hard to see what would be gained by shifting this responsibility.

The Financial Reporting Council and its satellite bodies, including the Review Panel, have been extremely successful in encouraging a high level of integrity in UK financial reporting.

Why risk the benefits and achievements of what we currently have by a wholesale reorganisation?

Of course there is always scope for any system to be strengthened. Indeed, moves are already underway to boost the effectiveness of the panel. We support the proposal for it to take on a more proactive role in investigating company accounts.

The panel has been effective in making sure accounting standards are met and in getting the agreement of the few companies that have not complied to re-issue corrected accounts. That has been without resorting to legal proceedings and a court order.

The panel is able to draw on a mix of experienced legal, business and accounting professionals. The FSA’s expertise is in regulation. There is a danger it could adopt a rule-based, legalistic approach and be less in-tune with business. Experience with the US SEC has shown the majority of reviewers are not accountants and they can struggle to understand what they are looking at.

Finally, the FSA already has enough on its plate. Its responsibilities for financial services and financial markets are being added to by the EU Financial Services Action Plan and there’s its role as the UK Listing Authority. Yes, the panel could do better but is there really any advantage in handing the FSA a huge extra workload, which is being done well by the existing body?

Taking all this into account, our advice to the government is clear, modify the existing system, but don’t scrap what ain’t broken.

  • John Cridland is deputy director general at the Confederation of British Industry

Partners against crimeBy Peter Williams

The government should approve the deal where both the Financial Reporting Review Panel and the Financial Services Authority are partners in policing departures from the law and accounting standards in companies’ annual reports.

Ever since former Accounting Standards Board chairman Sir David Tweedie used to show a picture of a gallows to illustrate what would happen to those falling foul of the FRRP, it has probably punched above its weight.

Such has been its reputation that it has never had to resort to the courts to force a company to restate its accounts.

The problem with the FRRP is it will only beat up on a company after its alleged misdemeanour has been drawn to its attention. Such a passive approach is no longer acceptable to politicians or the public post-Enron.

The panel – and its overseeing body the Financial Reporting Council – has known for some time that the UK regulation of company accounts needed to become more proactive.

But it probably also knows that this monitoring role is not for the FRRP.

It doesn’t have the resources and to acquire them would be difficult.

On the other hand, the FSA is ideally placed. It is charged with maintaining confidence in the financial markets and supervising exchanges. By being involved in accounting supervision, it is sending out a strong message that financial reporting matters.

However, the FSA would be foolish to think it can do this vital supervisory task on its own. It should treat the FRRP as an equal partner in this venture: it would be a mistake to throw away the cumulative experience and strong track record of the FRRP.

In essence, the FSA should be on the frontline hunting out dubious accounting practices. It should then hand over the suspects for trial by the FRRP.

This is not only the right solution, it also has a major advantage as far as the FRRP and accountancy industry is concerned.

If a company fails and the warning signs were in the accounts, it’s the FSA that will get it in the neck for not spotting the crime – not the FRRP. Sounds like an ideal working relationship to me.

  • Peter Williams is a freelance journalist.

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