Watchdog is ‘beholden’ to accountants, MPs are told
business@inews.co.uk
A delay in creating a tougher British auditing regulator means the current watchdog is “sheriff of only half a county”, beholden to the goodwill of accountants for funding and data, MPs heard.
After the collapse of builder Carillion, retailer BHS and café chain Patisserie Valerie, three governmentbacked reviews in 2018 and 2019 proposed sweeping changes to auditing and corporate governance, including a new Audit, Reporting and Governance Authority (Arga).
The body would replace the Financial Reporting Council (FRC), armed with more powers to deal with powerful accounting firms, such as EY, PwC, Deloitte and KPMG, the “Big Four” that dominate auditing of listed companies.
However, several years later ministers are yet to introduce legislation to set up the new watchdog.
FRC chief executive Richard Moriarty told MPs the watchdog has come a long way in meeting many of the recommendations from the reviews, but “serious gaps” remain that need filling with legislation.
For example, company directors are not held to the same standard of accountability as accountants as the FRC can only punish directors who are qualified accountants.
The regulator is also “beholden” to accounting firms for information used in investigations, whereas other regulators can demand data, he said.
The Government pulled draft rules from Parliament in October that would have applied some of the Carillion and BHS lessons. It also gave the FRC a new remit to consider Britain’s competitiveness.
The watchdog later ditched plans to toughen corporate governance rules for listed companies after lobbying by the London Stock Exchange.
John Kingman, who chaired one of the three reviews, told the parliamentary Business and Trade Select Committee that without Arga there was a risk of falling back on improvements made at the FRC.
“The house has been impressively rebuilt but it’s still on inadequate foundations,” he said. “The peril of that is they are up against large vested
interests, and they have to operate through persuasion and not by power,” Mr Kingman said.
As its establishment moves “further over the horizon”, the audit reform to bring vibrant competition is slowing down, Scott Knight, head of audit at accountants BDO said.
It means that change will “take decades”, added David Herbinet, head of audit and assurance at accountants Mazars.
The Financial Reporting Council said it was freezing staff expansion plans due to the legislative delay in transforming it into Arga.