The majority of individuals recently recruited to the FRC’s advisory panel have at some point worked for a Big Four firm, raising concerns about their objectivity when it comes to making recommendations that are in the public interest.
The Financial Reporting Council (FRC) recently announced 19 new appointments to its advisory panel, a body established in January of this year that can be called upon for input and advice on any aspect of the regulator’s work.
For example, its reach includes the FRC’s work on corporate reporting and audit firm supervision, audit market supervision and audit quality review.
The panel can also offer advice on regulation and public interest issues and advice to the enforcement division on case matters
Big Four dominate
Of the 19 new appointments, 14 – or nearly three-quarters – have at one stage in their career worked at one of the Big Four firms, with nine of those holding senior positions of partner or similar.
The panel is advisory and not a decision maker, however, concerns have been expressed that ex-Big Four panellists’ understanding of what is in the public interest would be shaped by their business and professional interests, which could produce lacking outcomes for the general public and investors.
Prem Sikka, emeritus professor of accounting at the University of Essex and long-term critic of the FRC and the Big Four, described the panel as “unsatisfactory”.
“No doubt it is tattooed on the foreheads of the corporate soldiers recruited by the FRC they must act in the broader public interest, but the truth is that their understanding of the public interest is shaped by their business and professional interests, rather than what is good for the masses,” he told City A.M.
“A diversity of views is necessary for consideration of broader social interest, but the panel lacks diversity.”
According to the watchdog, because it cannot have practicing auditors on its board, it tends to have them on the panel as it “need[s] recent experience, particularly to inform the development of standards.”
However, the FRC has repeatedly been criticised for being too close to the industry it supervises, and being too slow and feeble when dealing with serious misconduct.
Mark Babington, executive director of the regulatory standards division of the FRC, said the panel needed a mixture of experience and skills, including those with a background in audit.
“The FRC advisory panel comprises individuals with a diverse mix of experience and skills needed to provide advisory input on the various aspects of the FRC’s work in the public interest,” he said.
“Therefore, as well as those with a background in audit, there are asset managers, a number of individuals who hold NED positions at charities, trusts and on regulatory bodies, former civil servants, lawyers, an academic and a number of individuals with a background in climate and ESG reporting.
“This panel provides advice to the FRC executive and is not decision making. We look forward to benefitting from the Panel’s experience.”
Audit firms have come under increasing pressure in recent years following accounting scandals that undermined public and investor confidence in the sector.
Soon, a new watchdog will be created to oversee the sector – the Audit, Reporting and Governance Authority (ARGA) – which will in theory have more power than the current FRC.
Just last month think tank IPPR said the audit sector was “failing society“, and that there was an “expectation gap” between what audit currently assesses and what it needs to assess to fulfil the expectations of the general public.