Following widespread criticism from a government review, the accounting regulator Financial Reporting Council (FRC) is to be abolished and replaced by a new regulator. The FRC will be replaced by the Audit, Reporting and Governance Authority in a move to boost the quality of a sector which forms a crucial part of the British economy.
The FRC, which currently employs around 200 people, is under substantial pressure after a number of high profile corporate accounting scandals. The collapses of Carillion and BHS, as well as the discovery of alleged accounting fraud at high street café chain Patisserie Valerie, have led many to question the effectiveness of firms operating in the audit sector. Doubts have been cast over the practices of the “big four” firms KPMG, PwC, Deloitte and EY in particular.
KPMG has come under scrutiny for its oversight of Carillion which went under with debts of over £5 billion, while PwC has attracted negative attention for its audit work at BHS.
Having a “tough and robust regulator”, capable of ensuring best practice at UK firms, is important for the British economy. Audit and accountancy services provide a £59 billion annual boost to Britain’s gross domestic product, according to a study by Oxford Economics Ltd released in November last year.
The new Audit, Reporting and Governance Authority will operate very differently to the FRC, which the report condemned for being too cosy in the way it regulated auditors. A new chair will oversee the transition to the Audit, Reporting and Governance Authority and the existing head, Sir Win Bischoff, will step down.
The new regulator will have enhanced powers. It will be able to intervene directly and make changes in company accounts without having to go to court first. What’s more, it will have powers to regulate the biggest audit firms directly.
The Audit, Reporting and Governance Authority will also be able to implement greater sanctions in the event of corporate collapses and, in serious cases, publish a report on them.
Overall, 48 of the report’s recommendations will be implemented in an attempt to increase confidence in British auditing.