Audit watchdog’s new powers signal shift
The Financial Reporting Council (FRC) is still dealing with the fallout from the financial crisis.
The accountancy regulator has attracted criticism recently for its decision not to investigate KPMG over its role in the collapse of banking giant HBOS in 2008. Chief executive Stephen Haddrill is in the middle of drafting a response to the chairman of the Treasury select committee (TSC) Andrew Tyrie, who at the beginning of the month asked for assurances about rigour of fresh enquiries into the auditing of HBOS.
The FRC promised to reexamine the big four firm after an investigation into the bank’s collapse by the Financial Conduct Authority and its sister regulator within the Bank of England, the Prudential Regulation Authority. The FRC, which currently has a staff of around 150 and expects that to rise in coming years, has brought in a range of reforms since the crash with arguably the biggest happening in 2012, when FRC took on the recommendations of the Kay review on long-term investment and the Walker report on banking governance.
This year, however, will see what could well be the biggest change to the regulator, an increase its stewardship from the top ten biggest accountancy firms to the top 50 from June 2016 as a result of the EU Audit Regulation Directive.
“The further 50 are a lot different from the big four, with whom we spend the majority of our time now,” says FRC chief executive Stephen Haddrill. As the FRC takes on this additional responsibility it wants to further implement a strategy involving looking forward, instead of backwards.
“Classically, corporate reporting has been the rear-view mirror, looking at what happened last year, explains Haddrill. “We've done what we can to have a forward-looking focus, we have this requirement for companies to have a longer-term viability statement.”
All of these changes will be helped by the FRC being given more powers to gather information from not just the accountants, but from the firms that are being audited themselves.
“Currently we have the ability to secure and scrutinise the material in the possession of the audit firm. We don’t have the power to require the company to report to us.”
The inability to access company information directly has been a thorn in the side of the FRC.
“At the moment we get there with some cajoling but it's far from a perfect system,” says Haddrill.
As a result of its additional tools at its disposal the regulator is seeking a marked improvement in the firms it oversees.
“Every audit we look at we attribute a grade to, and we want to bring the number that require no more than so called limited improvements to under 10 per cent from over 30 per cent currently,” explains Haddrill. “These powers will result in a significant shift, in the way we go about our regulatory work.”
As part of promises made to the TSC, the FRC will publish its findings on KPMG whether it decides to carry out a full investigation or not, and Haddrill says he welcomes the chance to be more transparent.
“We have struggled to be as transparent as we’d like to,” he adds.