FRC CEO Stephen Haddrill faced strong criticism from MPs from the work and pensions and business, energy, and industrial strategy select committees over the regulator’s failure to spot problems with the construction company in the months leading up to its collapse at the beginning of the year.

Haddrill rejected claims the FRC was ‘toothless’, saying it was ‘one of the most effective audit regulators in the world’.

MPs questioned why the FRC had not stepped in earlier, given that Carillion was the most widely shorted stock in the run up to its March 2017 reporting. Haddrill said the regulator had been ‘actively monitoring’ the situation since July 2017, when Carillion made its first profits warning, but the requirements of the Companies Act for confidentiality meant it could not release details at the time.

Haddrill confirmed that the KPMG Carillion audit was last reviewed in 2013 as part of the FRC annual audit quality inspection reports (AQI). In 2015 it reviewed the accounts and asked Carillion to provide additional disclosures about contract outcomes going forward.

When pressed by MPs about the effectiveness of the Corporate Governance Code he conceded that the FRC had no power to review the overall quality of a company’s corporate governance as the FRC cannot enforce the Code. He also indicated frustration at the limitations on the regulator’s review of financial statements and the strategic report, suggesting it would like to have oversight of remuneration policy, amongst other areas.

Haddrill said: ‘When changes to the audit regulations came in 2016 the government issued a direction that we should delegate as much as we possibly could under EU directive and regulations to the professional bodies.

We didn’t find that right at time – as audit regulators we want to hold all the powers ourselves.’

MPs challenged the fact that KPMG held the Carillion audit for 19 years, while ex-KPMG employees held senior finance roles at the company, with Frank Field, chair of the work and pensions committee, describing the Big Four firms as an ‘oligarchy’.

In his responses, Haddrill indicated the Competition and Markets Authority (CMA) reforms may have failed to created more competition at the top end of the market, suggesting it should look again at its recommendations regarding audit tender timescales.

‘The regulations are less than two years old and we need to review to see how they are working. The combination of the rotation and independence rules means in some sectors we may well end up with even less than four firms competing for jobs,’ he said.

MPs were highly critical of the length of time the FRC had taken over previous audit investigations, pointing out it was now 19 months since it began looking at PwC’s auditing of BHS, while the MG Rover probe took a decade.

Haddrill said the BHS investigation was ‘close to completion’ and that the FRC was working much more quickly on Carillion, although there was a need to avoid cutting corners. He also said the regulator was looking at potentially investigating individuals at Carillion and its auditors, in relation to possible misconduct, with news on this expected shortly.

Report by Pat Sweet