Independent review of the Financial Reporting Council

• A review of the Financial Reporting Council (FRC) has recommended that it needs to be replaced with an independent statutory regulator, accountable to Parliament, with a new mandate, new clarity of mission, new leadership and new powers.    This would be the Audit, Reporting and Governance Authority.
• The review also recommends:
  • that self-regulation of major audit firms through their professional bodies should end, with regulation of these firms transferred to the new regulator.
  • major steps in transparency, with Audit Quality Reviews and Corporate Reporting Reviews published for the first time.
  • the new regulator should have significant new powers to investigate concerns relating to companies, their accounts and governance
  • a fundamental overhaul of quality assurance of local authority audits, with the review voicing concern that the “quality of this scrutiny is being pared back at the worst possible time”.

Sir John Kingman was asked by the Business Secretary, Greg Clark, in April to lead the root-and-branch review as part of the Government’s modern Industrial Strategy commitment to strengthening the UK’s world-leading business environment.  The FRC regulates auditors, accountants and actuaries in the UK, sharing this responsibility with the professional membership bodies.

Sir John Kingman will tomorrow (Tuesday 18 December) publish his report.  Sir John said:

“All in all, some of the FRC’s critics overstate their case.   Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.   The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world.   We need to take the opportunity to make a fresh start.”.

The Review recommends that the new regulator has an overarching strategic objective to protect the interests of investors and the wider public interest by setting high standards of corporate governance, corporate reporting and statutory audit, and by holding to account the companies and professional advisers responsible for meeting those standards.

Recommendations by the Review include:

• The new regulator should have a duty to promote competition and innovation in the audit market  
• It should also promote brevity, comprehensibility and usefulness in annual reports and accounts
• The enforcement regime should be strengthened, and not restricted to statutory auditors and directors who happen to be members of professional bodies
• A fundamental overhaul of the Stewardship Code to give it greater credibility and effectiveness
• Abolition of the voluntary levy which currently part-funds the FRC, and its replacement with a statutory levy
• Much tighter restrictions around staff working on firms for which they used to work
• A new market intelligence function, to identify and act on emerging risks
• A new “duty of alert” for auditors to report serious concerns about corporate viability to the new regulator in order to identify risks at an earlier stage

The review also recommends that:

• Regulation of the actuarial profession should move to the PRA
• The FRC’s current limited role in scrutinising the quality of the NAO’s audit work should, subject to the will of Parliament, be extended and made more transparent.

ENDS

Notes to editors

• Sir John Kingman is Chairman of Legal & General plc, the largest institutional investor in the UK. He is also Chair of UK Research & Innovation. Until June 2016 he was Second Permanent Secretary to HM Treasury, where he worked on a wide range of issues relating to economic performance, investment and financial markets.  He is a Visiting Fellow of the Centre for Corporate Reputation, Oxford University.

• The Review has been led by Sir John Kingman, who has extensive private and public sector experience. He has been supported by an advisory group.

• In accordance with the Review’s terms of reference, the advisory group has scrutinised and challenged the Review’s findings and recommendations, as well as advising on the direction of the Review and sources of evidence. It comprised:
  • Lucinda Bell: Formerly CFO at British Land; Non-Executive Director and Audit Chair, Rotork plc; Non-Executive Director Crest Nicholson Holdings plc and Derwent London plc; Treasurer Citizens Advice;
  • Mark Burgess: Deputy Global Chief Investment Officer, and Chief Investment Officer EMEA, Columbia Threadneedle;
  • John Cridland: Chair, Transport for the North, leading the State Pension Age review; formerly Director-General, Confederation of British Industry (CBI);
  • Amelia Fletcher: Professor of Competition Policy, University of East Anglia; Non-Executive Director, Financial Conduct Authority, Payment Systems Regulator, and Competition and Markets Authority;
  • Simon Fraser: Chair of F&C Investment Trust and the Investor Forum; Chairman of Fidelity Funds (SICAV) and The Merchants Trust plc, formerly Chief Investment Officer of Fidelity International Ltd
  • Sir Peter Gershon: Chairman, National Grid plc; Chairman of the Aircraft Carrier Alliance and Chairman the Dreadnought Alliance, formerly Chair, Tate & Lyle plc;
  • Teresa Graham: Chair, Salix Finance, Chair, HMRC Administrative Burdens Advisory Board; Chair Lexi and Nomad Cinemas, previously Deputy Chair of the Government’s Better Regulation Commission (BRC), and a Partner at accounting firm Baker Tilly (now RSM);
  • Dame Mary Keegan:  Former chair, Accounting Standards Board, previously partner at PwC, and HM Treasury’s former Managing Director for Government Financial Management Development,
  • Nikhil Rathi: Chief Executive Officer, London Stock Exchange Plc at London Stock Exchange Group plc; and
  • Anne Richards: Chief Executive Officer, M&G Investments.

• The Independent Review of the FRC issued a Call for Evidence which ran from 6 June 2018 to 6 August 2018, to cover: the purpose and function of the FRC; its impact and effectiveness; its powers; legal status and relationship with government; governance and leadership; funding, resources and staffing; and its role in reducing the risk of major corporate failure. It received 102 formal responses.

• The Review aims to make the proposed new regulator the best in class for corporate governance and transparency, fulfilling the role of helping to safeguard the UK’s leading business environment.