Long-standing concerns among certain stakeholders, the media and the public about the regulator’s closeness to the audit market were again raised this week when it dropped its investigation into KPMG’s audit of HBOS in the period that led up to the bank’s collapse in 2008.

‘I’ve never seen “regulatory capture” in real life,’ said PwC chief risk officer Margaret Cole. ‘In order to understand the business that financial firms are in, it is very useful for regulators to have people who have worked in those businesses and my experience of that is they are usually quite zealous in pursuing issues because they understand the business they are regulating.’

‘Regulatory capture’ refers to when agencies, created to act in the public interest, instead advance the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.

On whether there was a perception issue around the regulator’s make-up, Cole asked: ‘”Who do people think should work in those organisations?” would be my counter question. I don’t think people go into those organisations in order to protect their former firm. They usually have a reason they want to move on in their careers and they bring to it an understanding of how things work.’

The FRC concluded there was ‘not a realistic prospect of an adverse finding’ against KPMG over its audit work on HBOS. The firm’s work did not fall significantly short of the standards reasonably to be expected of the audit, the test that a tribunal would apply, it said.

‘I don’t think [the decision] was a surprise as it would have realistically have been quite hard for [the FRC] to land a successful case, so I think they’ve taken a rational decision,’ Cole said. ‘I have no doubt that the Treasury Committee will do what Nicky Morgan suggests and ask more questions about it, but it has to pass the test of whether there is sufficient evidence for a case to be landed.’

Morgan, chair of the Treasury Committee said this week it may take further evidence from the FRC in ‘due course’, stating ‘the Committee will expect the FRC to provide a full explanation of its decision not to take further action against KPMG’.

A key element of restoring public confidence in the regulation of audit would be undertaking and delivering investigations more quickly, said Hemione Hudson, PwC head of assurance.

‘One of the issues is that it has taken an awful lot of time [to commence and close the investigation],’ she said. ‘We would be in favour of dealing with these things much more quickly and in terms of things that are happening now, I think they are taking a much more swift look at it.’

Report by Calum Fuller