Britain's Secretary of State for Business Greg Clark gives a speech at the EEF National Manufacturing conference, in London, Britain, February 19, 2019. REUTERS/Hannah McKay
Business secretary Greg Clark said he would follow the recommendations of a damning review of the FRC © Hannah McKay/Reuters

Britain’s accounting watchdog is to be scrapped in favour of a stronger regulator with powers to issue harsher penalties and investigate company directors in an attempt by the government to restore trust in the scandal-hit audit market.

Business secretary Greg Clark said on Monday that he would follow the recommendations of a damning review last year of the Financial Reporting Council by giving a new watchdog significantly greater oversight of the Big Four accounting firms.

The new Audit, Reporting and Governance Authority will be able to make direct changes to accounts rather than having to apply to a court to do so, make use of a wider range of sanctions in cases of corporate failure and publish reports into a company’s conduct and management.

Mr Clark commissioned the FRC review — conducted by former civil servant and Legal & General chairman Sir John Kingman — last year amid mounting concerns the regulator was too slow to investigate misconduct, its sanctions too lenient and its board too close to the industry it supervised.

A string of recent accounting controversies at high profile companies including Carillion, BHS and Patisserie Valerie have intensified concerns around the FRC’s effectiveness.

The decision to dismantle the FRC, which was established in 1990, will come as a blow to Stephen Haddrill, who has run the regulator as chief executive over the past decade. Sir Win Bischoff, the FRC’s chairman, will stand down when the leadership of the new body is appointed.

Sir Win said: “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.”

Among the biggest changes backed by the government is giving the new regulator the power to investigate company directors. Currently the FRC can only investigate company directors if they are also registered with an accounting body.

In an attempt to address concerns about conflicts, Arga’s staff will not be able to work on any regulatory project that involves a previous employer, according to the government proposals.

The new watchdog will also have to respond to all freedom of information requests it receives. The FRC has been criticised for not providing full responses to most FOI applications, arguing its structure meant exemptions applied.

The government will also open a separate consultation on whether to adopt a “strengthened framework around internal controls” that reflects the US Sarbanes-Oxley regime.

This requires company directors — typically the chief executive and finance director — to certify that the accounts do not contain misrepresentations or untrue statements. There are harsh penalties — big fines or even prison terms — if they do. The government said it would open a consultation on introducing a similar regime, which Big Four accounting firm EY has lobbied for, in the UK “in due course”.

Mr Clark said: “This new body will build on our status as a great place to do business and will form an important part of strengthened public trust in businesses and the regulations that govern them.”

In total, the government said it would implement 48 of the recommendations made by Sir John. A government consultation on the proposals will remain open until June. Sir John said: “We need a new audit regulator with a clear and precise sense of purpose and I am pleased that the government shares that vision.”

Ian Peters, chief executive of the Chartered Institute of Internal Auditors, said: “We called for radical change to the audit regulator last year, following the devastating collapse of Carillion, and we are pleased that the government has acted quickly. This new body must play a leading role in preventing future Carillions.”

Get alerts on Accountancy when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article