The government has backed key proposals in the Kingman review to abolish the Financial Reporting Council (FRC) and replace it with a new regulator
The Financial Reporting Council (FRC) regulates auditors, accountants and actuaries, and they set the UK's Corporate Governance and Stewardship Codes. However, the government has now replaced the FRC with the Audit, Reporting and Governance Authority (ARGA), after the FRC came under fire for its seeming inability to halt major collapses in the audit industry.
The ARGA will have a new mandate, new leadership and stronger powers set down in law. Recruitment for the new chair, deputy chair and CEO will begin shortly. Until the new regulator is in place the government is going to begin working with the FRC to implement 48 of the 83 recommendations to address the shortcomings identified in the review, “such as lack of transparency and to reinforce work to enhance enforcement activity”.
Business secretary Greg Clark said, "On behalf of the government I am pleased to endorse and accept the case presented for this major set of reforms of the regulation of company audit, accounting and reporting. “Shareholders, investors and the wider public must have every confidence in company reports and audited accounts,” he added.
The government is going to move “as quickly as possible” and to introduce the legislation as soon as Parliamentary time allows.
The independent “root and branch” Kingman review, published in December 2018, found the FRC to be a “hangover from a different world” and said it should be replaced by a new independent body with more powers to make a difference.
The review was commissioned by Clark after questions were raised about the FRC’s role in the wake of the collapse of BHS and Carillion.
ICAEW chief executive Michael Izza said, “Sir John Kingman’s Review has far-reaching implications for audit, and it is right that his recommendations are scrutinised from all quarters, not just within the accountancy sector, but also by business and wider society.
“We are pleased that the government wants to act swiftly, but must consider how Kingman’s recommendations will work alongside the findings from the Competition & Markets Authority’s market study, and the output from Sir Donald Brydon’s review into the quality and effectiveness of audit. Taken together, these must constitute a coherent and comprehensive programme of reform, which will reinforce the role of audit in sustaining a strong economy, and cement the reputation of the UK as a great place to do business.”
In response to the consultation current FRC chair, Sir Win Bischoff, said, “We welcome this consultation and hope that a diverse range of organisations and individuals respond to it. In line with the consultation document, we believe the speedy implementation of the recommendations can help increase public confidence in audit in the UK. We will move forward to implement the agreed proposals as soon as possible.”
The Business, Energy and Industrial Strategy (BEIS) consultation, stated the new regulator will for the first time be a statutory body with “powers such as those to make direct changes to accounts rather than apply to court to do so, and more comprehensive, visible reviews for greater transparency.”
It will regulate the biggest audit firms directly rather than those being delegated and have a new, more diverse, board.
ARGA will also be able to hand out bigger sanctions, including new powers to require rapid explanations from companies and in the most serious cases publish a report about the company’s conduct and management.
There will be a consultation period that will last for 12 weeks.