UKSA and ShareSoc responded jointly to Sir John Kingman’s review of the Financial Reporting Council (FRC). We summarised our assessment of the FRC’s current strengths and weaknesses and made suggestions for addressing the weaknesses. The main points we made were:
Our main desired outcome is firmer and faster action against those who violate the integrity of reporting standards. It seems to us (and to the general public) that in practically every financial scandal or financial crisis, the FRC seems to have taken far too long to decide and too often has concluded that nothing has gone seriously wrong. We have the following suggestions about achieving our desired outcome of firmer and faster action:
- Companies and auditors should be told and know that concerns about doubtful behaviour and practices will be publicly exposed at an early stage.
- A more principles-based approach to regulation is necessary. Rules cannot account for every eventuality and are easy to ‘game’.
- A lower bar for regulatory action is required. This could be greatly reinforced by:
- providing immunity from prosecution for the Regulator;
- shifting the burden of proof to the producers of reports, rather than the users;
- Introducing a new category of regulatory “concern”, where the FRC is aware of concerns but has not necessarily started a detailed case investigation;
- Continuing to encourage better standards of governance and behaviour.
- A clearer role and remit should be set for the FRC. We believe that the overall mission (to promote transparency and integrity in business) is consistent with our overall desired outcome. However, greater clarity is needed in terms of what this involves and how the FRC will go about achieving it.
- Change in culture and organisation.
- The FRC’s board is currently dominated by the producers of reports, namely companies, auditors and lawyers. The balance needs to be towards the users of these reports in the broadest sense (investors, analysts, customers, suppliers and employees) and the majority of board members should be drawn from those communities.
- The FRC needs to recruit executives who clearly understand that their role is to make decisions so as to achieve the goal of firmer and faster action, transparently. The current culture of delay and obfuscation must change: the current behaviours of seeking more information, of trying to be 100% sure and allowing cases to drift on must change and those executives who fail to change should be counselled and if necessary asked to leave.
- The power to hold company directors to account and take action against them regardless of whether they are qualified accountants or members of an accountancy body.
- More resources should be provided, if required, in order to meet the above outcomes.
- A proper remit should be included to address the current weakness in capital maintenance standards (almost entirely lacking in IFRS, for example).
- The FRC should review the industry concentration and potential separation of the audit function out of the Big Four professional services consultancy firms.
The FRC should be given 3 more years to prove that it has changed; if not, it should be abolished and its duties allocated to other bodies. There are arguments that this should be done now, but to do so would ensure massive disruption and there is no guarantee that the new body would be any better. The FRC already does much work that is good or very good. There are also signs that it is already addressing certain weaknesses. With sufficient help and encouragement it should be able to achieve the desired result of firmer and faster, transparent regulation with lower risk than other solutions.
Our proposals are discussed in more detail in the responses which are attached to the links below.
Peter Parry, Policy Director of UKSA, did most of the work on our joint response and I would like to thank him for his hard work.
Cliff Weight, Director, ShareSoc