The U.K.’s business secretary announced on 11 March that the Financial Reporting Council (FRC) will be replaced with a new regulator following a recent review conducted by Sir John Kingman of the London Stock Exchange.
That overseer will have “a new mandate, new leadership, and stronger powers set down in law,” according to the press release from the Department for Business, Energy & Industrial Strategy (BEIS), and it will be called the “Audit, Reporting and Governance Authority.”
“The government sees a tough and robust regulator, and an audit sector with the highest standards, as a key part of attracting investors, jobs, and growth to the U.K.”
Greg Clark, Secretary of State for Business, Energy and Industrial Strategy
In addition, the BEIS published a consultation on implementing certain reforms that will open immediately and close on 11 June this year while the new regulator is being staffed and developed. The BEIS will work with the FRC to move forward 48 of the Kingman review’s 83 recommendations, such as tackling a lack of transparency and enhancing enforcement activity. The government commissioned Kingman in April 2018 to make recommendations on how to reform the FRC and make sure that the U.K. had “a world-class audit and accounting regulator.” That review was published on the 18 December last year.
Audit, Reporting and Governance Authority duties
- 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
- have strategic direction and duties to protect the interests of customers and the public by setting high standards of statutory audit, corporate reporting, and corporate governance, and by holding companies and professional advisors to account
- regulate the biggest audit firms directly (rather than those being delegated)
- have a new, diverse board and strong leadership to change the culture and rebuild respect of those it regulates
The new authority will have access to greater sanctions in cases of corporate failure, 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.” For example, the regulator will now endorse an enforcement regime that holds directors to account for their responsibilities in creating true, fair, compliant accounts and corporate reports and their ability to maintain open and honest relationships with auditors. In addition, a stronger corporate review process is being proposed that will cover the entire annual report, including governance reporting, and will be based on risk exposure. The new authority will also have the ability to order changes to corporate accounts directly without having recourse to the courts.
Another key duty of the agency will be to reclaim the approval and registration of audit firms from the Recognised Supervisory Bodies; this will incorporate a range of sanctions, “including some that are less severe than the ‘nuclear option’ of audit firm deregistration.” Audit Quality Reviews conducted by the authority will be published and will name both the auditor and the company being audited.
The new authority will also address conflict of interest issues within its staff, and be focused on current and future risks rather than retrospectively, as now, after a problem has been identified.
Some of the additional powers that will be part of its remit include:
- Address conflict of interest issues within the staff
- Focus on current and future risks, rather than post-risk once a problem has been identified
- Require firms to procure additional assurance on reports and accounts
- Require firms to have an independent boardroom evaluation, such as of an audit committee
- Require a formal response from the board, with a recovery plan if appropriate, in the event of a serious problem or flaw in reporting
- Order the removal of the auditor or an immediate retendering
- Issue a report to shareholders suggesting that the company’s dividend policy should be reviewed
- Issue a report to shareholders suggesting the removal of a CEO, CFO, chair or audit committee chair, or for other strengthening of the board of directors
Click here for more information on the Audit, Reporting and Governance Authority.