The Financial Reporting Council was criticised after the collapse of Patisserie Valerie in 2019 and Carillion in 2018 © FT montage; Tolga Akmen/Bloomberg

The head of the UK regulator overseeing financial reporting has admitted that it was not up to the job during a series of business scandals that have unleashed a far-reaching overhaul of audit and corporate governance.

Sir Jon Thompson, chief executive of the Financial Reporting Council, told the Financial Times that he agreed with criticism of the regulator following company collapses including Carillion in 2018 and Patisserie Valerie in 2019.

Thompson also said a beefed-up regulator to replace the FRC, due to be established by the government under much-delayed reforms, was not expected to be in place until 2023.

Asked whether the FRC was “asleep at the wheel” during corporate failures, he told the FT’s Board Director series: “The answer is yes. Let’s be straight forward about it.”

The FRC is the custodian of the UK corporate governance code that applies to listed companies, and also regulates auditors, which were criticised for failing to sound the alarm ahead of collapses such as Carillion.

“Were we complicit or in some way responsible for corporate failure? Well, it’s probably arguable that as a regulator we weren’t anywhere near as strong enough, we weren’t big enough, and we weren’t transparent enough to make a difference to the system,” said Thompson.

He added that a review of the FRC by Sir John Kingman, which described it as a “ramshackle house” and recommended the watchdog be replaced by a stronger regulator, had been “generous” in its findings. 

Thompson, who joined the FRC in September 2019 after three years as head of HM Revenue & Customs, said it had taken some steps to improve its effectiveness.

The government is now engaged in a public consultation about reform of corporate governance and the creation of the FRC’s successor body after outlining the proposals in a white paper in March.

The FRC is due to be replaced by an independent regulator called the Audit, Reporting and Governance Authority (Arga), which will be led by Thompson.

Sir Jon Thompson, chief executive of the Financial Reporting Council, said he agreed with criticism of the regulator ©

He said that Arga would not be ready until 2023, which would mean that some changes to corporate governance rules would be delayed until 2024.

The white paper outlined a UK version of Sarbanes Oxley, the US legislation introduced after the Enron scandal, under which directors will be held responsible for the accuracy of a company’s financial statements — with fines and bans for major failures.

Thompson said the stricter rules would “potentially” deter non-executive directors from joining company boards, although he added that they should expect “higher levels of reward” for their increased responsibilities.

He also said that not all directors would be pursued in the case of a corporate failure given that “some have more responsibility than others”.

More large private companies, including those owned by private equity groups, are set to be brought into the scope of the FRC’s jurisdiction under the government’s reforms.

Thompson said these companies would not be expected to meet the same standards as listed businesses, but there would be “accountability for those who run the largest privately owned companies in the UK”.

Ministers are keen to present the UK as open for business after Brexit, but some executives have warned that tough new corporate governance rules could deter overseas investors and companies considering a stock market listing in London.

Thompson said it was “vital to investors and financial markets” to be able to rely on company reporting, even if “you could argue that it makes us slightly less attractive at the margin”.

Meanwhile, Thompson said the government’s proposed reform of auditing would not have any significant effect on the dominance of the Big Four accounting firms — Deloitte, EY, KPMG and PwC — “in the short term”, adding they were “too big to fail”.

Ministers are seeking to break the Big Four’s stranglehold auditing FTSE 350 companies by proposing “managed shared audits” involving smaller accounting firms. A Big Four firm would lead on the audit and retain overall liability, but a smaller rival could do a portion of the work.

“We cannot expose the smaller firms to the liability of auditing a FTSE 350 company,” said Thompson. “It’s too much for them to take on.”

But he added that shared audits would give smaller accounting firms experience in scrutinising the accounts of large companies. “That’s the way to build up their capacity, but it’s a slow burn, it’s going to take a long time,” he said.

The government has proposed giving the FRC powers to impose a cap on the Big Four’s share of the FTSE 350 audit market if competition in the industry does not improve, but Thompson said this was “not really an area where I want to go”. “I don’t think in [the] short term we’d be looking at using [those powers].”

Stephen Haddrill, who was FRC chief executive between 2009 and 2019, said the Kingman review was the “most authoritative source” on the regulator’s actions, “particularly the point about the FRC needing additional powers which have not been secured”.

Sir Winfried Bischoff, chair of the FRC between 2014 and 2019, said “perceptions of the effectiveness of regulation change with the incidence of accidents”, and “when that happens regulators of whatever industry . . . and in whatever jurisdiction are invariably perceived to have been behind”.

“The recommendations of the John Kingman review and that of Donald Brydon [into audit quality and effectiveness] and the willingness of [the business department] to legislate should help Jon and the FRC to minimise that perception in future,” he added.

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