The government should act “as swiftly as possible” to abolish and replace the UK’s audit watchdog, MPs were told today.
Sir John Kingman, who chaired a review into the operation of the Financial Reporting Council (FRC), said the regulator’s senior leadership should be overhauled in the meantime.
“I would like to see the government get on with this,” Kingman told members of the Business, Energy and Industrial Strategy (Beis) Select Committee.
The Legal & General chairman called for the short-term recommendations of his extensive report into the watchdog – released last month – to be introduced while legislation is prepared for its complete replacement.
Kingman said the FRC needed a “new chief executive and a new board” as soon as possible.
He has called for the FRC to replaced with a new statutory body – which he dubbed the Audit, Reporting and Governance Authority (Arga) – after undertaking a government-backed review launched in the wake of the collapse of Carillion.
The audit sector has faced strong criticism over the last few year, following a series of high-profile company failures linked to accountancy issues. The FRC has faced particular scrutiny for an alleged failure to hold audit firms to account, and was labelled “toothless” in a Beis committee report into failed construction firm Carillion, released last year.
Kingman told MPs the UK needed a regulator that could hold sway over auditors and gain their respect, though added that it would “take time” for a new body to do that.
“Right now the FRC does not have the tools to do the job,” he said. “It has no regulatory levers over the audit firms at all because we still have self-regulation.”
In parallel with Kingman’s report, the Competition and Markets Authority (CMA) released an update on its probe into the audit sector last month, in which it set out a series of potential remedies to improve competition in the sector – which is currently dominated by the Big Four of Deloitte, EY, KPMG and PwC.
Audit chairs caution MPs over audit ‘remedies’
Kingman appeared as part of a series of hearings on audit which the Beis committee is undertaking. He appeared after an appearance by two audit committee chairs: Steve Barber of AA, and Margaret Ewing of ITV.
They were critical of the CMA’s recommendations, urging MPs to consider the wider implication of tinkering with audit regulations.
Barber said there was a risk of auditors being unfairly blamed for company failures.
“In my experience the auditors have often been blamed. The first line of defence and the first line of blame is management. It’s as simple as that,” he said.
Ewing echoed his comments, saying: “Not all failures have much to do with audit, but I accept there have been some failures in audit.”
Both defended audit committees at top firms for choosing the Big Four – which collectively audit 97 per cent of the FTSE 350 – to check their accounts, arguing that smaller challenger firms were not always up to the job.
“I wouldn’t say they’re incapable, but they do not have the depth of resource that the big firms have, and in my experience, having pitches from the smaller firms, they are in a different league,” he said.
Both cast doubt over the value of introducing a joint audit system, similar to one in France, where two companies split work on a company’s accounts. Ewing said the smaller firm would often “struggle to cope” in her experience, while Barber said France had introduced the system in order to “fight the anglo-saxon dominance of the audit profession”.
The Beis committee is set to hear from FRC representatives and senior employees from audit firms next week.