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Paul Brehony discusses the winding down of the FRC and the impact across the accounting profession in Accountancy Daily

By Paul Brehony

Partner Paul Brehony discusses the need to replace the Financial Reporting Council (FRC) with a re-invigorated regulator that has powers to investigate and impose meaningful sanctions on errant companies, company directors and their advisers.

Paul’s article was published in Accountancy Daily, 25 January 2024, and can be accessed here

The omission of audit reform from the King’s speech last November was met with a combination of weary inevitability and deep frustration across accounting regulators and the profession more widely. According to the ICAEW, inertia by the government on this issue leaves in place inadequate rules, an underpowered regulator and a reduced capacity to anticipate and address the next Carillion. It was, of course, the collapse of Carillion six years ago that finally forced the government’s hand in committing to comprehensive reform underpinned by primary legislation.

In response to the news of further delay to audit reform, ICAEW Chief Executive Michael Izza said: “We won’t be able to handle the next Carillion-like event any better than we did the last one. And the pressures in the marketplace that the primary legislation was intended to deal with – oversight of directors, competition, quality – will remain unresolved. These are issues that will need to be tackled by a future government.”

Kicked down the road again, the audit and corporate governance reform bill and the new enhanced regulator, the Audit, Reporting and Governance Authority (ARGA) that was conceived to deal with the oversight of directors, competition and quality will simply have to wait until another day before coming to fruition.

In reality, few of those who had been watching events were surprised that the ambitious package of corporate governance reforms was delayed. They also recognised that any efforts to revisit the current proposals could not realistically happen until after the next general election, which has to take place within the next 12 months, or possibly much sooner.

For now, the proposals have therefore been mothballed: they are very unlikely to feature as an issue of concern to many during a protracted election campaign in which the very early warning shots have already been fired. Yet despite corporate governance and audit reform not being issues which keeps most voters awake at night, it does not diminish their importance.

Politicians and businesses alike now recognise that we need to replace the Financial Reporting Council (FRC) with a re-invigorated regulator that has powers to investigate and impose meaningful sanctions on errant companies, company directors and their advisers. It was therefore deeply disappointing to read various media reports which have suggested that officials at the Department for Business privately indicate that the reforms are “not seen as a political priority”.

This creates further concern. A packed parliamentary timetable will inevitably follow a new government of whichever colour, and if audit reform is not viewed as a priority, we may well not see an appropriate reform programme re-emerge until 2027 at the earliest. Adding further weight to this suggestion, a recent press release from the FRC, setting out its priorities for 2024/5, made no reference at all to the ARGA roll out.

In seeking potential comfort elsewhere, another government press release on cutting red tape, published last October, does at least give some cause for optimism.It suggests that reform will still happen because a political consensus on the issue does exist between the two main political parties, as evidenced by their respective public statements.

The competing priorities of successive Conservative governments have been key features of delay on audit reform. Should the Conservatives manage to re-emerge as winners at the next election, but again fail to deliver on the issue in government, sceptical commentators would be right to point out that this has become a well-established pattern: over the past five years, reforming audit legislation has been delayed by no less than six successive business secretaries.

Currently clear favourites to form the next government, the opposition Labour Party has already committed to passing the long-awaited legislation on audit and corporate governance reforms should it assume the reins of power. Last September, the shadow business secretary, Jonathan Reynolds, confirmed that a new Labour government would enact the required legislation in order to deliver the ARGA regulator as a replacement for the FRC.

But history shows that electoral promises made on both sides of the political divide have often been broken once a party is in power. To ensure that whichever of them forms the next government actually delivers the primary legislation which finally gets audit reform over the line, it is perhaps important to remember why reform is so badly needed.

The push for reform was originally driven by The Department for Business in order to restore public trust in the management and supervision of big companies. The impetus to do so came in the wake of high-profile corporate collapses and widespread concern over their audit quality, including BHS in 2016 and Carillion in 2018. The government wanted to pass legislation to ensure that the largest corporate entities in the UK would be governed responsibly and any red flags would be spotted before it was too late.

Government plans for a new regulator were first announced in 2019. They followed recommendations made by three seperate independent reviews led by Sir John Kingman, the Competition and Markets Authority (CMA), and Sir Donald Brydon.

CMA Chairman Andrew Tyrie concluded: “The Government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only 4 firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.”

Detailed government proposals were published in March 2021 with the expectation that legislation would be fully implemented last year. But since Tyrie’s robust critique, we are no closer to seeing the deficiencies of the present regulatory system put right.

According to commentators, failure to make progress has been caused by a combination of ministerial ineptitude, effective lobbying by the Big 4 accountancy firms, and political expediency. Irrespective of the precise cause, it remains important that progress is made soon after the election.

Persistent delay does indeed carry the risk of another BHS or Carillion occurring with all the associated costs, as well the destruction of people’s jobs and livelihoods. Whenever parliamentary time allows, legislation must be implemented without further delay.

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