FRC chief urges audit reform before next corporate scandal
The boss of the accountancy regulator has issued a direct warning to the government, urging them to pass audit reform legislation during “peacetime” rather than waiting for a major corporate collapse or scandal.
Speaking on the latest episode of the Following the Rules podcast, Financial Reporting Council (FRC) CEO Richard Moriarty, said: “Given the thinking that’s gone into audit reform over the years, I would wish to avoid it only becoming a parliamentary priority on the back of something going wrong.”
The Labour government resurrected the Audit Reform and Corporate Governance Bill, which would reform the Financial Reporting Council (FRC) into a new regulator, in its first King’s Speech in July 2024.
The return of the Bill had been on the cards since it was shelved by the previous government in November 2023 in order to focus on “growth and the UK’s competitiveness”.
However, since the Bill was reactivated, there has been no movement on it, which has resulted in over 60 Parliamentarians in September calling the stalling of the Bill very disappointing.
Moriarty has said he has raised the lack of movement on this Bill with both government ministers and the opposition parties, stating, “it is always so much better to do such reform during…peacetime and not on the back of potentially a failure or a scandal where a political response says that something must be done.”
He explained: “Everyone can recognise that the government at the moment is having to balance a number of priorities for what is currently a bottleneck of parliamentary time.”
“Clearly, I will always make the case for audit reform, but there are a great many others who will make the case for other pieces of legislation to take priority,” he added.
Moriarty: firms should push back on audit rules
Despite lacking promised statutory powers, the FRC is expanding its reach through new supervisory methods.
“We’ve gone about supervising the audit firms in new ways. We look not just at inspections of audit files, but increasingly we are turning our attention to systems of quality management and assurance within the firms,” Moriarty explained.
He noted that despite legal gaps, audit quality among the largest firms has tracked consistently upward since the 2018 Kingman Review, “because we are providing that focus around leadership, investment culture, and systems of quality management within the firms.”
He believes it is vital not to be “distracted” by the missing legislation and instead to focus on being the best organisation possible under current laws.
When it comes to SMEs in particular, Moriarty said: “I want to encourage more corporate clients to push back a bit with auditors. It’s very easy for auditors to say, ‘we need to do this because of
regulation or standards or procedures,’ all of which may be true.
However, I think it is also incumbent on corporates and audit committees to push back and
make sure that the audit is proportionate and not over-specced for the needs of the entity.”