The author of a report recommending extensive reform of the UK’s financial reporting and audit watchdog is unhappy with its progress. Indeed, Sir John Kingman, the chair of Legal & General, has written a letter to parliamentarians revealing his concern that unfinished reforms to the Financial Reporting Council (FRC) means it could “drift on,” without the powers it needs.
The letter, sent to Rachel Reeves MP, chair of the influential business select committee in the House of Commons, notes that the recent Queen’s Speech, setting out the government’s legislative programme, failed to include action on FRC reforms.
Sir John concedes that some changes have been made to the regulator, including a new chair and chief executive, but there are key reforms needed to make it an effective body.
“The final crucial piece of the jigsaw, however, is legislation to put the new regulator onto a proper statutory base—and to give it the powers it needs to do its job,” writes Sir John.
“It is therefore disappointing that this legislation was not included in Monday’s Queen’s Speech.
“I clearly recognise that the government has many competing priorities. But given the unequivocal consensus around the need for change, I am concerned about the risks of letting the FRC drift on, half reformed and lacking the teeth that only legislation can give it.”
Sir John’s recommendations were published in December last year, chief among them the advice to do away with the FRC and replace it with a new body called the Audit, Reporting and Governance Authority.
In reality that meant remoulding the FRC to fit with Sir John’s recommendations, including the replacement of key people and the recruitment of many more staff to undertake enforcement and analytical work.
However, government has yet to place a bill before Parliament focused on giving the new body powers outlined in Sir John’s report.
Among the powers he called for were the authority to order a “boardroom evaluation” focused on particular areas of concern, “such as a specific examination of the effectiveness of the audit committee.”
Sir John wants the watchdog to be able to order “rapid explanations” from companies in response to concerns raised by the regulator. There was also a call for the watchdog to have the capacity to commission a “skilled person review” where there are worries about a company in relation to the regulator’s core objectives. Sir John also proposed the power to “order the removal of the auditor or an immediate retendering”, or order a board to put forward a “recovery plan” if needed.
In serious cases, Sir John sought powers for the watchdog to issue a report to shareholders proposing a “review” of dividend policy, or that they should consider sacking the chief executive, chief financial officer or, indeed, the audit committee chair.
“The review believes that, where the severity of the facts merit it, the regulator should have the confidence to do this,” Sir John’s report said.
When he first issued his report, Sir John was scathing about the FRC. He wrote: “What this spotlight has revealed is an institution constructed in a different era—a rather ramshackle house, cobbled together with all sorts of extensions over time.
“The house is—just—serviceable, up to a point, but it leaks and creaks, sometimes badly.
“The inhabitants of the house have sought to patch and mend. But in the end, the house is built on weak foundations.”
This week the government issued a statement saying: “We are committed to implementing the outcome of Sir John Kingman’s review and will legislate to put the new audit regulator on a statutory basis as soon as parliamentary time allows.”
Despite Sir John’s concerns about the delay to FRC reforms, the government work looking at the audit market is not entirely finished. Though the Competition and Markets Authority has also made recommendations on changes to the structure of the audit market—including recommendations for joint audits and asking big firms to split audit operations from consultancy services—the government is till waiting for a report on the scope and quality of audit from Sir Donald Brydon that is expected before the end of the year.
A letter from the business secretary Andrea Leadsom said: “Together these studies will be the basis for long-lasting, proportionate and effective reform, many of which will require primary legislation. All must come together to form a strategically solid, coherent programme of change that will ensure meaningful, wide-reaching reform.”