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Haddrill defends comply and explain principle

The Financial Reporting Council's (FRC) chief executive Stephen Haddrill has defended the current comply or explain system for audit tendering at the Council's Annual Open Meeting (AOM).

Haddrill was responding the recent provisional findings from the Competition Commission (CC), which proposed mandatory audit tendering and rotation, as well as giving additional powers to audit committees and shareholders.

While the FRC supports the CC's stance on mandatory tendering to counter a lack of competition among large audit firms, he remained wary of full legislation.

Baroness Hogg, chairman of the FRC, supported Haddrill's view, saying retendering would be better than mandatory rotation, which effectively takes one firm "out of the market". She added that comply and explain allows firms to move quickly without the "rigidity" of law.

Haddrill was also wary of the timing of the CC report, as it several topics "mirror" discussions ongoing in Brussels, meaning any development could effectively end up being overridden by EU law.

He added that some proposals were similar to those of the FRC but questioned why, when the FRC has just proposed ten year rotation, the CC would require more frequently; adding that they may need to reconsider if the CC decided to provide "more evidence".

Baroness Hogg also stressed that currently, non-compliance with audit tendering was "limited", but when it did arise the emphasis should be placed on "good quality" explanations.

Jane Fuller of Chartered Financial Analyst UK aired concerns over the current trend for emphasising the narrative front-end of audit reports, at the expense of back-end financial statements.

Melanie McClaren, the FRC executive director of governance, codes and standards, responded that the narrative section of the audit report was important in giving the auditor a chance to clearly set out the tone of the audit. This is "what investors want", and they are becoming more engaged in audit than was the case a few years ago.

She added that while financial statements remained an integral part of the audit report, a lot of pressure had been placed on narrative reporting both internationally and from national standard setters, and it also remained important in an IFRS context.

 

The year ahead

The AOM was scheduled as a forum for the FRC to lay out its plans for the year ahead, and several announcements were made.

The FRC will be increasing its levy rates in the coming year, which it justified by the large amount of work it had recently completed in advocacy for UK standards, and in placing the work of accountants and auditors within the governance framework. This included opening a Brussels office.

Haddrill also set out a six-point reform programme, covering:
- Monitoring and enforcement of audit reporting; while there is progress in the upper end of the FTSE 350, the lower end is yet to tighten up its compliance. The FRC has so far been "forgiving" on IFRS implementation, but will now become tougher.
- Stewardship: Not supervising boards, but making sure that investors do. Improving the quality of explanations and the effectiveness of the stewardship code
- Corporate Reporting: Making reports more accessible, supporting the Financial Reporting Lab.
- Improving public confidence in the value of the audit: Not just improving audit quality but also closing the gap between public expectations and the realities of what the audit is for and what it can achieve.
- Reviewing actuarial regulation.
- Looking at economic and market context: Considering any regulation in the light of the market and the economy, rather than just for technical reasons.

The consultation on the FRC budget is open from now until 28 March, with the board considering its response on 23 April and a finalised plan and budget due to be published at the end of that month.

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