Kingman: it’s public confidence that matters

In his response to the Kingman review of the Financial Reporting Council, former LSCA President Malcolm Bacchus calls for a greater focus on the role of the whole board, and not just auditors, if public confidence in financial statements is to be restored.

November 2018

The Kingman review of the FRC was launched in the wake of unprecedent political and public scrutiny of audit and regulation of the auditing profession. Following discussions with ICAEW members and businesses with whom I worked, and a worry that smaller organisations would be underrepresented in the final responses, I decided to submit my own response to the review.

One of the key planks of my response was that confidence in financial reporting for all stakeholders would be enhanced if there were more effective ways of holding boards of directors to account. The board as a whole, not the auditors nor any qualified accountant on the board, is primarily responsible for the financial statements but, at present, where a board of directors is found at fault, the FRC is solely able to discipline any accountant or actuary on that board. This creates an unfair playing field where possibly the most culpable remain unpunished.

The FRC states that it encourages “directors of companies to fulfil their responsibilities to wider society as well as their companies’ shareholders”. In practice, that is all the FRC can do: it can only encourage. It cannot ensure that they fulfil their responsibilities to shareholders, let alone the wider society or discipline them if they fail in those responsibilities. I argue therefore that any disciplinary body emerging from the Kingsman review should have the power to discipline, by way of censor, fine or exclusion from directorship, any director of a public interest entity.

It is always better however to prevent failures from occurring at all.  Significant concentration recently has been on audit quality but audit is only a back stop. If the financial statements were correct, audit failure, if it occurred, would never be noticed. In my response I also argue therefore that the FRC needs to focus on why failures occur and, more often than not, the root causes of these arise from the culture in the business or auditing firm.

In resolving this, the FRC’s future strategy needs to place more emphasis on the conduct of boards and senior management within companies and their auditors. Maybe, I suggested, earlier intervention and more behavioural psychologists and fewer accountants on their staff would be a start.

Engender the right conduct in business and, when necessary, punish those who are most at fault and, who knows, public confidence just might return.

Malcolm Bacchus is a member of ICAEW Council, chair of the ICAEW Ethics Standards Committee and immediate past president of the LSCA. The views expressed in this article are his own.

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