The Government has confirmed it intends to abolish the Financial Reporting Council (FRC) and replace it with a new, independent statutory regulator with stronger powers.
The move follows recommendations made in the final report of an independent review of the FRC, led by Sir John Kingman, on which we reported in April. That report sets out 83 recommendations for reforming the FRC, including the following:
- Replacing the FRC “as soon as possible” with a new, independent regulator with a smaller board, which would be called the “Audit, Reporting and Governance Authority” (or “ARGA”).
- Giving the ARGA responsibility for approving and registering audit firms that carry out audits on public interest entities (PIEs). (This responsibility currently lies with the UK’s four regulatory supervisory bodies (or RSBs).
- Undertaking more corporate reporting reviews (on a “risk-based basis”), reporting findings publicly and publishing full correspondence.
- Expanding the concept of “public interest entity” to (potentially) major private companies, pension funds and asset management companies, subjecting more entities to mandatory auditor rotation and corporate reporting reviews.
- Tasking ARGA with promoting brevity and comprehensibility in accounts and annual reports, and ensuring that reports are proportionate and valuable.
- Reviewing and reforming longer-term viability statements to make them more effective, or (if that is not possible) abolishing them completely.
- Implementing a pre-clearance procedure for accounts to assist companies with more complex accounting treatments, such as profit recognition and measurement.
- Giving ARGA a power to direct changes to a company’s accounts without having to go to court, providing the regulator with a significant tool to rectify deficiencies.
- Instituting an effective enforcement regime to hold a PIE’s CEO, CFO, chair and audit committee chair to account for failing to prepare true, fair and compliant accounts.