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FRC outlines proposed audit and corporate reporting supervision powers

Author: ICAEW Insights

Published: 29 Apr 2021

The Financial Reporting Council has provided more details relating to supervision under new corporate governance proposals, including broadening the regulator’s review powers to allow it to scrutinise the entire contents of a company’s annual report and accounts.

In a webinar hosted by the Financial Reporting Council (FRC), the regulator explained the scope of reviews into corporate reporting and audit quality. It also highlighted some of the practical implications of proposed changes to Public Interest Entity (PIE) auditor registration.

Among the recommendations outlined in the government’s Restoring trust in audit and corporate governance: proposals on reforms white paper is a broadening of the regulator’s review powers that would allow it to scrutinise the entire contents of a company’s Annual Report and Accounts. Currently, the regulator’s Corporate Reporting Review (CRR) powers only extend to the strategic report, the accounts themselves and the directors’ report.

Meanwhile, the regulator’s remit could also extend to cover a wider range of investor information such as preliminary announcements and press releases, depending on the results of an ongoing pilot study by the FRC and Financial Conduct Authority (FCA). BEIS is also proposing that the regulator has the power to order amendments to company reports directly. Under current rules, it requires a court order to do so.

The consultation also sets out proposals for the regulator to assume responsibility for deciding which individuals and firms should be approved to audit PIEs. And where systemic auditor quality issues are flagged up, the BEIS proposes that the regulator should have sanctions at its disposal.

“The FRC review was concerned that the delegation of the approval and registration of auditors leaves the regulator without appropriate powers to act where there are systemic quality issues identified at a specific firm and the review considered that it would be better if those powers sat with the regulator,” Claire Lindridge, the FRC’s Director of Audit Market Supervision. “This is another level of oversight and power over PIE auditors.”

David Rule, Executive Director of Supervision, said the FRC was still thrashing out the details of how auditor registration would work in practice, particularly in relation to professional bodies: “Current thinking is this will go live next year. When an audit firm applies to register, it will indicate whether it intends to audit PIEs. It will submit its application through the body as now, but the relevant bit of the application will be forwarded to us for our review.”

The proposals also promise more transparency of the regulator’s review work. More specifically, the government is planning to legislate to allow AQR reports – either in summary or as a whole - on individual audits to be published by the regulator without needing the consent of the audit firms or the audited entity to ensure greater levels of transparency on the performance of PIE auditors.

Similarly, BEIS also believes that giving the regulator the power to require a UK group auditor to provide it with access to overseas component working papers will make the performance of PIE auditors more transparent.

‘Ramp up’ corporate reporting review

Spanning 232 pages, the proposed BEIS reforms set out to restore public trust in the way that the UK’s largest companies are run and scrutinised and ensure that the UK’s most significant corporate entities are governed responsibly, in anticipation of the establishment of new regulator ARGA.

The government’s ambition is to ramp up corporate reporting reviews, and extra resources are already being devoted to this area. While the consultation proposes that the regulator should focus most of its proactive corporate reporting review work on PIEs, it should also have the power to investigate reporting by non-PIE companies.

Despite the FRC review recommendation to offer companies a pre-clearance service by the regulator for any novel and contentious accounting treatments in advance of the annual report and accounts being finalized, Malcolm Miller, Case Director in the FRC’s Corporate Reporting Review team, said that initial feedback on this idea was mixed.

“There are a lot of questions in terms of how the regulator stays independent on some of the decisions made and how much resource that might be required and making sure the regulator is not an arbiter between a company and its auditor – it’s really complicated to strike the right balance,” Miller said.

“What the consultation document is proposing is that ARGA has any necessary powers and indemnities to provide this service but it will leave it to the discretion of the regulator to decide if and when it implements it,” Miller added.

The objective of BEIS reforms under consultation is to give investors, creditors, workers and other stakeholders access to reliable and meaningful information on a company’s performance and a significant milestone towards setting up a new, robust and independent regulator, ARGA.

Find out more about the FRC’s outreach programme relating to the BEIS consultation including a series of roundtables to provide stakeholders with further insight into key aspects of the consultation register to attend any of the webinars. 

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