The Carillion collapse in 2016 prompted widespread agreement that UK auditors needed more effective regulation. The Financial Reporting Council (FRC) is supposed to do that but it has come under much criticism, for example in December 2018:
“Two major Select Committees have accused it, in the strongest terms, of timidity, a lack of pace and excessive closeness to those it regulates.”
My own experience testifies to that. Brands are the most valuable assets many companies own. In the 1990s, we tried to persuade the FRC to recommend that companies placed their values on their balance sheets. After all, if balance sheets do not inform people about their most valuable assets, what are balance sheets for?
We were wasting our breath. The FRC was totally unable to grasp what a “brand” is? 30 years on, a company can put the price paid for a brand on the balance sheet, but not its value (unless it has declined), still less the value of any brand the company already owns.
In short, we can all agree that UK auditors need better regulation, that the FRC, despite recent improvements, is dominated by the Big Four auditors, and should be removed, not reformed. Six years on, what was formerly BEIS announced that the:
“Government will revamp the UK’s corporate reporting and audit regime through a new regulator, greater accountability for big business and by addressing the dominance of the main audit firms.”
The FRC was to be replaced by a new, stronger regulator – the Audit, Reporting and Governance Authority (ARGA) – with tougher enforcement powers. But where in all this is the professional body?
The government does not tell doctors how to practice medicine nor solicitors how to practice law. And regulators are proving a mixed blessing: Ofgem has presided over a huge transfer of money from impoverished consumers to Centrica, Shell, BP and other fat cat energy providers, whilst Ofwat sanctions sewage filling our rivers. Ofcom allows price rises well above inflation.
For a start, it is absurd that the auditors, whose job to is ensure the company’s directors are behaving themselves, are hired, fired and have their remunerations set by those same directors. Hang on, you may say, surely large companies have audit committees. They do:
“An audit committee is made of members of a company's board of directors and oversees its financial statements and reporting.”
The solution is simple: audit committees should be mandatory for all large or listed companies but they should comprise members elected directly by shareholders, not directors, and should have responsibility for hiring, firing and remunerating auditors.
Secondly, the professional body should set auditing standards and police their adherence in a similar way to other professions. In this case, what is the Institute of Chartered Accountants in England and Wales (ICAEW), with its 165,119 members and, according to its 2021 accounts, £53.6M membership fees and £33.7M net surplus after tax doing with all that money? Similar comments apply to Chartered Accountants in Scotland and Ireland.
Well of course the ICAEW does do regulation but that is delegated to its Regulatory Board (IRB) which in turn has delegated that to the Professional Standards Department (PSD). That again is delegated to the Regulatory Practice & Policy (RPP) and the Quality Assurance (QAD) teams.
Then there is the important role played by the Professional Conduct Department (PCD) which ensures there is an effective deterrent against poor conduct or poor-quality work. And, lest we forget the IRB also has general oversight of the performance of Professional Standards committees. Is it any wonder that this bureaucracy does not want to tangle with the big players?
The government should abandon its plan to replace the FRC with another, almost certainly useless, regulator but put the ICAEW on notice to become the tough professional body it should be or lose its Royal Charter. That was given in 1880 by Queen Victoria, left intact for 68 years and fiddled about with ever since, most recently 1994.
The relevance here is that solving the Carillion, or quis custodiet, problem does not require legislation, just a quick decision by the Privy Council.