The FRC held its Annual Open Meeting on 21 September 2017 emphasising the importance of improving corporate governance to ensure that the reputation of UK business is maintained despite the uncertainty surrounding Brexit.
This was followed by a speech on 25 October 2017 by the FRC CEO Stephen Haddrill looking at 'Developments in Audit'. Both speeches raise interesting challenges and give an indication as to the FRC's priorities in the coming months and years.
Below is a summary of the main points from the keynote speeches to the FRC Open Meeting:
- Whilst the quality of audit has been improving, the FRC feels that there is still more to be done to meet its target of 90% of FTSE 350 firms' audits requiring only limited improvements.
- The FRC is currently exploring options for the UK’s future accounting framework in light of Brexit. Recognising that the International Financial Reporting Standards (IFRS) play a vital role for comparability, nonetheless the FRC needs to "understand the UK impact and if, subject to some strict criteria, there are points that need to be adopted differently in the UK we should not be afraid of exploring those." In addition, the FRC stressed the importance of a need for answers on equivalence and the need to maintain a Third Country Auditor regime post-Brexit in order to give confidence to investors and for auditors to work across borders.
- The FRC welcomed the government's recent proposals for reform of the corporate governance framework, which included: proposals for a wider role and new powers for the FRC to act as regulator and enforcer of directors' duties; the development of a new corporate governance code for large, privately held companies with 2000 plus employees; and a new body to oversee compliance with the new code.
In his 'Developments in Audit' speech on 25 October 2017, Stephen Haddrill set out that:
- In respect of audit reporting, whilst extended audit reports are to be welcomed, audit should move away from past performance review and become more forward-looking. In particular: "It is time for law makers and standard setters, whether at international level or through bodies like the FRC at national level, and through the profession, to ask whether audit should be fitted with front-facing halogen spotlights as well as reversing lights. The FRC will lead debate with the profession, with lawmakers and international bodies, to explore and embrace that idea and to respond to that challenge."
- In respect of enforcement (and responding to recent stories in the press):
- The test of misconduct, formerly established in the previous statutory framework, is too high a bar for taking cases in relation to audit. For new cases, under the 2016 audit regulation regime the test of misconduct has been replaced and enforcement action can be taken on the basis that there has been a breach of the relevant requirements. This is a lower threshold test than proving misconduct and it is expected that "more potentially deficient audits will therefore be investigated, prosecuted and ultimately sanctioned to varying degrees."
- Recently retired Court of Appeal Judge, Sir Christopher Clarke, has been instructed to lead a panel to review the FRC sanctions regime and consider if the range of fines and sanctions available is adequate to safeguard the public interest and deter wrongdoing. The panel will report later this year.
- Cases must be brought to tribunal much faster. Recent new powers are expected to help in this regard particularly securing information from companies. At 30 lawyers, the FRC legal team is also now four times the size it was a few years ago.