The UK’s Financial Reporting Council (FRC) should be replaced with a new independent statutory regulator, accountable to Parliament, according to a review by Sir John Kingman (The Kingman review).

Dubbing the prospective new regulator ‘the Audit, Reporting and Governance Authority’ (ARGA), the review said it would need a new mandate, new clarity of mission, new powers and new leadership.

The last point is something that would have happened regardless, after current FRC boss Stephen Haddrill announced his intentions to step down in 2019.

The far reaching review also called for the self-regulation of major audit firms through their professional bodies to end, with those powers being transferred to ARGA.

ARGA should also have the power to investigate concerns relating to companies, their accounts and governance.

This would fix at least one issue the FRC highlighted to the government following the collapse of Carillion earlier in 2018.

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The Kingman Review called for more transparency in the industry, including the publication of Audit Quality Reviews and Corporate Reporting Reviews, and for a ‘fundamental’ overhaul of quality assurance of local authority audits. The review voiced concerns that the quality of this scrutiny is being pared back at the worst possible time.

At the launch of his review, Kingman said: “All in all, some of the FRC’s critics overstate their case.  Nevertheless, I have sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work.  The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world.  We need to take the opportunity to make a fresh start.”

Releasing the same day as the Competition & Markets Authority released its provisional findings on the market, which included recommendations including splitting up the Big Four UK firms, the Kingman review said ARGA should have a duty to promote competition and innovation.

Amongst its other recommendations were:

  • “It should also promote brevity, comprehensibility and usefulness in annual reports and accounts
  • The enforcement regime should be strengthened, and not restricted to statutory auditors and directors who happen to be members of professional bodies
  • A fundamental overhaul of the Stewardship Code to give it greater credibility and effectiveness
  • Abolition of the voluntary levy which currently part-funds the FRC, and its replacement with a statutory levy
  • Much tighter restrictions around staff working on firms for which they used to work
  • A new market intelligence function, to identify and act on emerging risks
  • A new “duty of alert” for auditors to report serious concerns about corporate viability to the new regulator in order to identify risks at an earlier stage.”

While the recommendations for ARGA would result in a regulator far more powerful that the FRC, its powers would not extend to the actuarial profession. Instead the Prudential Regulation Authority would regulate this.

Commenting on the audit related announcements by the CMA, Sir John Kingman and Government, Michael Izza, ICAEW chief executive, said: “The proposals announced today from Sir John Kingman and the CMA tackle the underlying issues of regulation, quality and competition in the audit market, and taken together they amount to the kind of bold intervention that we have been calling for. We will now need to study them in detail, and of course they will be subject to further consultation and debate, not least during the forthcoming parliamentary select committee inquiry.

“We have argued for some time that the natural follow-on to this work should be a fundamental and independent examination of the role of audit itself. The expectations of investors and wider society have increased in recent years, and we need to ensure that audit keeps pace.

“Chartered accountants accept the need for change. We look forward to working with all parties to produce effective recommendations for regulation and legislation which will improve quality and increase choice in the market, while ensuring that audit meets the future needs of British business and wider society.”