The Kingman review of the FRC, which is to have a detailed look at whether the regulator can achieve its aims (and indeed what these aims should be) with its current structure and powers, has launched a call for evidence, open until 6 August 2018. The call for evidence launches quickly into the concerns raised that gave rise to the review, quoting the questions raised as follows:
- whether or not the FRC is, as was charged in the recent Select Committee report on Carillion, “chronically passive”, “timid” and requiring culture change;
- whether or not it is too slow, insufficiently proactive, and whether its actions have sufficient deterrent effect; and
- whether or not it is too close to, or unwilling sufficiently to challenge, the “big 4” audit firms – in a market in which there are well-documented structural competition weaknesses. Since, in practice, most consumers of accounts are in no position to apply direct pressure as customers, the need for an effective regulator of audit quality is fundamental.
Of course, there is much more detail in the report in terms of individual questions to consider, but the above gives you a good flavour of the issues at stake.
Andrew Tyrie, the new chair of the Competition and Markets Authority has signalled his intention to conduct a further review into the concentration of listed audit work within the Big 4 firms. This follows on from the Select Committees who looked at the collapse of Carillion recommending a CMA review. As yet there is no formal opening of an investigation at the CMA, but this may merely be that any investigation would need some scoping first.
Interestingly, the number of auditors dealing with public interest entity (PIE) audits has dropped since the changes in the regulatory landscape in June 2016. This appears to be primarily because all PIE audits are now overseen by the FRC, where previously smaller ones would have been dealt with by ICAEW. The increased management time and risk involved with an FRC regulatory oversight appears to have caused many firms to reconsider their approach and drop any PIE audits. This further reduction in competition in a market that already has issues is not what the CMA will want to hear.
This week the FRC issued sanctions against PwC and the partner responsible for the audit of BHS and Taveta Group. Both were given heavy fines, (£10m for the firm and £500K for the partner, though reduced for early payment by 35%) severe reprimands and the partner banned from audit work for 15 years. In addition, PwC are now required to undertake additional monitoring of its Leeds audit practice and to change its policies to require engagement quality control reviews of all non-listed high risk or high profile companies (including those employing at least 10,000 people in the UK). The full report on the findings appears not to have yet been issued.
The BHS problem prompted the desire for a corporate governance code to be in place for large unlisted entities and on 13 June 2018 the FRC , on behalf of James Wates CBE, issued this consultation. We looked at the earlier consultation on the full code and we will come back to this in