The Financial Reporting Council (FRC) has published its budget and levy rates for 2016/17, announcing a 14% rise in annual levies for financial institutions and listed companies to meet increased costs to fund its new role as competent authority for audit regulation under the EU Audit Regulation and Directive (ARD)
The total budget for 2016/17 is set at £33.5m, split between £19.9m for core operating costs relating to audit, audit quality reviews and audit enforcement cases, as well as £13.6m allocated to corporate governance and reporting.
The new responsibilities to monitor compliance with the ARD has been the catalyst for a major recruitment drive at the accounting regulator, which has resulted in a need to recruit additional staff and increase preparer levies in order to plug the gap created by the final withdrawal of government funding.
There is a 14% increase in the preparer’s levy, which goes up from £13m to £15m, with the largest increases being borne by major listed financial institutions.
The FRC is allocating additional resources of £1m to support its new role as the UK competent authority for audit regulation, which starts in June 2016. This includes an additional £400,000 for audit quality review activities, which is staff related, and £600,000 for core costs, again mainly due to additional staff plus increased overhead allocation of £200,000.
The operational costs for this year include an additional £1.5m to fund the FRC’s other work in corporate governance and reporting compared to the 2015 spend.
The FRC’s total staff costs are put at £20.1m in 2016/17 compared to the £18m currently estimated for this year.
The plan states: ‘Staff costs, the largest item, will increase in 2016/17 as we complete the process begun in 2015/16 of recruiting additional staff to deliver our new responsibilities as single competent authority under the ARD, and implement our new approach to our corporate reporting and audit quality monitoring activities.
‘Some of the recruitment took place across 2015/16 (10 roles, of which five are audit related). More will be needed in 2016/17 (a further 10 roles, of which eight are audit related). The budget also includes a pay award for all staff of 2.5%, a level we feel necessary to allow us to retain and recruit the staff needed to deliver our regulatory responsibilities.’
The FRC’s plan states: ‘Our budget for 2016/17 reflects the new responsibilities we have been given, which will require us to recruit additional people, and the final withdrawal of government funding. Assuming that in future we are not given additional responsibilities, we will aim to limit any increase in our annual budgets for the remainder of the strategy period to no more than the average increase in salaries across the sectors from which we recruit.’
In relation to its new duties under ARD, the FRC says the new EU audit legislation requires its work in audit to be securely funded. As a consequence, it says the audit profession should meet the full costs of audit regulation within the new regulatory framework to be implemented in June 2016.
To achieve this, the FRC intends to increase the funding requirement for the audit profession over the period of its three-year strategy set out in the new budget and plan; and reflect this adjustment in the funding requirement for other funding groups.
Initially, the FRC included a rebalancing amount of £1.5m in its draft budget, but has now reduced this to £1m in order to give the audit profession more time to adjust to the new funding arrangements. The regulator now says it intends to complete the realignment in the second and third years of the strategy period.
The FRC’s funding requirement for 2016/17 is £34.6m, of which £16.7m will come from its three levies on preparers, insurers and pension schemes. The total amount for the preparers levy will be £15m, up 14% from £13m this year.
Total preparers' levy 2016/17
| Budget 2016/17 | Budget 2015/16 | |
| £m | £m | |
| Preparers levy | 14.1 | 12.1 |
| UK contribution to IASB* funding | 0.9 | 0.9 |
| Total preparers levy | 15 | 13 |
* International Accounting Standards Board
The regulator will increase the minimum fee and the rates for levy bands one and two for listed and other companies with a market capitalisation/turnover of less than £1bn by 2%; and increase the levy rates for bands three, four and five by 20%.
Preparers' levy rates based on size of organisation 2016/17
| Organisation size per £m* | 2016/17 Preparers levy rate £ | 2015/16 Preparers levy rate £ | |
| Minimum fee | Up to 100m | £1,044 | 1,024 |
| Band | Per £m* | Per £m* | |
| 1 | 100- 250m | 10.23 | 10.03 |
| 2 | 250-1,000m | 7.8 | 7.65 |
| 3 | 1,000-5,000m | 7.07 | 5.7 |
| 4 | 5,000- 25,000m | 0.1151 | 0.0959 |
| 5 | > 25,000m | 0.0218 | 0.0182 |
Future plans
The plan lists the FRC’s major task for the coming year as establishing and making the most effective use of the new role as UK competent authority for audit regulation. Its aim is that by the end of the strategy period at least 90% of FTSE 350 audits will require no more than limited improvements as assessed by its monitoring programme.
Other priorities include work on corporate culture and promoting effective engagement between boards and investors, while on corporate reporting the FRC says it will focus on embedding recent changes, influencing the development of IFRS, and helping smaller listed and AIM companies with the quality of reporting. There will also be work to update the FRC’s suite of actuarial technical standards.
Stephen Haddrill, CEO of the FRC, said: ‘We are committed to maintaining an effective and proportionate regulatory framework for corporate governance and reporting.
‘We aim to embed regulatory changes introduced since the crisis and continue our work in highlighting the importance of good corporate culture and high quality reporting while taking on the significant new responsibilities we have been given as competent authority under the EU Audit Regulation and Directive.’
The FRC plan and budget 2016/17 is here
