The UK Government has backed the Kingman review, and will replace the Financial Reporting Council (FRC) with the Audit, Reporting and Governance Authority (ARGA).
The Government is in the process of appointing new leadership at the FRC which will eventually transition into ARGA. The FRC’s CEO Stephen Haddrill announced in October last year that he would be stepping down while the FRC’s chair Win Bischoff said yesterday that he also would be stepping down and that the deputy chair, Gay Huey Evans, will retire from her position at the end of her term on 30 April.
In the Department for Business, Energy & Industrial Strategy’s Independent Review of the Financial Reporting Council, the UK’s Secretary of State, Business, Energy & Industrial Strategy Greg Clark said: “The Government welcomes and shares the Review’s vision for a new regulator with a new mandate, new leadership and stronger statutory powers.
“The Government intends to move swiftly to implement these reforms. In the interim period until the new regulator is in place, we will be working with the FRC to take forward 48 of the Review’s recommendations. I welcome the FRC acting on a voluntary basis ahead of legislation.”
The Kingman Review was commissioned following a number of high profile company failures such as the collapse of construction company Carillion which brought about much scrutiny of the FRC for failing to act upon warning signals from Carillion’s auditors KPMG.
The Kingman review recommended that the FRC replacement should have a forward-looking role in overseeing company reports, alongside its current role of reviewing company accounts.
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The Government noted that implementing this approach would need careful consideration to ensure they could be delivered effectively and proportionately. It said it would work with other UK regulators such as the Financial Conduct Authority, Prudential Regulation Authority, and Insolvency Service, which already have forward-looking roles and responsibilities, to devise the best approach of implanting this at ARGA.
Following the inquiry into the collapse of Carillion, the FRC was also criticised for being too close to those that it is supposed to regulate. In order to tackle the alleged conflict of interest the Kingman Review suggested:
- The regulator not to allow staff, board or committee members ever to work on any regulatory functions relating to a past employer, removing themselves and/or delegating to other as necessary; and
- Written declarations for all staff members’ conflict of interest and financial interests should include proposed mitigations, and record any exercise of management discretion in relation to work undertaken relating to a former employer.
The Government has decided to implement this recommendation with immediate effect to ensure there are no future actual or perceived conflicts of interest.
Last month at an evidence session for BEIS’ Future of Audit inquiry, Haddrill said there would be some difficulties implementing this recommendation: “We do sometimes employ people who have had careers spanning two or three firms, so that would rather limit their ability and sometimes we move people around so that they don’t spend years and years working on the same firm because there is a risk of going native there, so we need to work out how to get a bit of operational flexibility.”
In response to the consultation Bischoff said: “We welcome this consultation and hope that a diverse range of organisations and individuals respond to it. In line with the consultation document we believe the speedy implementation of the recommendations can help increase public confidence in audit in the UK. We will move forward to implement the agreed proposals as soon as possible."
Institute of Chartered Accountants of Scotland chief executive Bruce Cartwright said: “The speed at which BEIS is implementing Sir John Kingman’s recommendations is reflective of the pressing need to address public trust and confidence in business and the auditing profession.
“However, this is only part of what is required in order to address this lack of trust. What is key is the consideration of the purpose and scope of audit and whether it remains fit for purpose. This is where the work of the Brydon review will be crucial.”