The Financial Reporting Council (FRC) has published its three-year strategy and plan for the 2018/19 financial year, which will include a previously announced comprehensive update of the UK’s corporate governance and investor stewardship codes, and indicates potential action on the dominance of the Big Four
The regulator is also planning a review of how audit should in future serve the public interest, and will introduce a new system for audit firm monitoring and supervision.
The FRC will publish the updated corporate governance code in the summer and consult on a new code for larger private companies. By the end of the year a consultation on the future of the stewardship code for investors will be published.
The FRC’s new approach to audit firm monitoring and supervision will focus on five areas: leadership and governance; values and behaviours; business models and financial soundness; risk management and control; and evidence on audit quality, including from the FRC’s programme of audit quality reviews.
Stephen Haddrill, CEO of the FRC said ‘Our work through our three-year strategic cycle is focussed on enhancing the UK’s credentials to compete on the global stage. Improving confidence in UK business for the public interest is vital as the nation navigates through major economic and social upheavals.
‘Our work to promote transparency and integrity in business means ensuring confidence in the way companies are governed, their financial reports and their audits is of utmost importance.
‘While we don’t have conventional regulatory powers to address weaknesses in corporate reporting, we will through this strategy period ensure boards are aware of their governance and reporting requirements. Where we find failings we will act.’
The strategy document notes: ‘Corporate failures such as Carillion have raised serious questions about the audit process. The scope of audit is an issue: as a snap shot in time, company audit does not evaluate future risk in anything like enough detail to enable investors to make informed decisions.
‘Similarly, while we have introduced new requirements in respect of risk reporting, we are still some way from having truly meaningful interpretations of what is a going concern. Our work on the future of audit will consider whether the current audit requirements are sufficient; whether the audit process should be extended to other areas; and whether auditors can play a greater role in assessing risk.’
The FRC highlights another current concern which has been brought into relief during the select committee hearings into the collapse of Carillion when it states: ‘Competition - or lack of it - at the top end of the audit market remains a serious concern. As a regulator we cannot be content that just four large firms dominate the market for audit services.
‘We believe that this has led to the risk of complacency in the behaviour of those firms. However, there is no easy solution and it is essential that any remedies do not result in further market concentration.’
The FRC’s 2018/19 budget for core costs (which exclude enforcement case costs) represents an increase of 3% over the budget set for 2017/18. The regulator’s overall funding requirement will increase by 1% as a result of additional work as competent authority for audit and for its new role in monitoring local public audit. The FRC says it will not increase preparers, insurance or pension levies in 2018/19.
