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Do you think the FRC’s enforcement powers should be enhanced?

23 May 2018

Do you think the FRC’s enforcement powers should be enhanced?

Our community assesses the teeth of the Financial Reporting Council

The government’s plan to review the powers, operations and impact of the Financial Reporting Council (FRC) seemed an ideal time for Governance and Compliance and Core’s community to express its own views on the regulator.

Some 57% of respondents opposed any enhancements to the FRC’s powers, with 27% in favour and the rest unsure. ‘I believe the existing FRC’s enforcement powers are adequate and would not want to see increased pressure on businesses,’ one person said.

However, one critic said: ‘Currently it is a little toothless and is seen as a technical body rather than an enforcer on publicly listed companies.’ Another said the FRC ‘seems to have been ineffective regarding Carillion, for example, but I am unsure whether it leveraged the powers that it already has.’

One person open to reform said: ‘I believe a lot of the success of the FRC to date has been due to the authority that comes from widespread support from, and voluntary arrangements with, its stakeholders, and not from statutory backing or enforcement powers. Any extension of the FRC’s powers should be carefully executed to ensure that this collaborative and supportive way of working is not adversely affected.’

Another respondent said: ‘Guidance should carry more weight and there should be power to fine or otherwise sanction firms and auditors whose actions result in significant damage to shareholder value. The ability to publicly censure companies is not enough.’

A majority of respondents credit the independence of the FRC, with 61% saying it was sufficiently independent of those it regulated, and only 11% saying otherwise.

‘I have seen no evidence to suggest they are not sufficiently independent of those it regulates,’ one person said. However, another commented: ‘Better balance and oversight from those who do not have Big Four [accounting firm] connections would not hurt.’

“Audit firms should be limited to the number of large audits they can carry out”

Despite the broadly positive view of the FRC in the survey questions, many respondents had more nuanced criticisms of how the watchdog operates. ‘There are clearly questions over the whole area of effectiveness of accounting and auditing,’ one person said.

One respondent recommended authorities ‘encourage competition between the audit firms, or somehow enable international alliances so that there are more audit firms able to carry out complex global audits.’

In a similar vein, another said: ‘As I think many people recognise, there are potentially serious issues around the majority of large companies being audited by one of four audit firms. Anything that could widen the scope of audit firms used by large firms would be useful.’

One person said: ‘A specific part of the auditors’ report in [a firm’s] annual report should state when they were appointed, when they were last subjected to a tender process and when the last audit partner rotation took place. This information should also be reproduced within the AGM notice.

‘Audit firms should be limited to the number of large audits they can carry out. The problem with audits is not in counting widgets, it is in the application of principles and judgments. Audit partners should spend more time on fewer audits to add the value that they should already be adding, but cannot because they are overstretched.’

Another person said: ‘Great work has been done on risk and internal controls and on forcing auditors to take a risk-based approach to large audits, but this birds-eye view approach can sometimes lead to less time and focus on the subsidiaries, and missed opportunities to spot lower-level systemic process issues.’

Not everyone focused on auditors though. On ‘comply or explain’, one person said: ‘It would be nice if the voting advisory bodies were held to the same standards, insomuch as they were required to explain why they do not think a company’s justification is valid or appropriate in their individual context.

‘There is little point having an “explain” option, if certain bodies’ blanket recommendation is a vote against any company using it, whether validly or not.’

Conducted in association with The Core Partnership

If you are a company secretary or governance professional at a leading UK business, and you would like to take part in or comment on future surveys, email team@core-partnership.co.uk

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