Local authority pension schemes have urged the UK government to break up the Financial Reporting Council (FRC) and make its successor bodies subject to full parliamentary scrutiny.
In a submission to the panel currently reviewing the audit watchdog’s future, the Local Authority Pension Fund Forum (LAPFF) said the FRC was beyond reform and riddled with conflicting objectives.
The submission – seen by IPE – said: “The central matter is upholding the public interest. The outcome must involve parliament… The regulatory model should be first and foremost implementing the laws that parliament has already passed. Parliament and the courts determine what the public interest is.”
The submission went on to warn that the “risk of bodies being buried” was sufficient reason to scrap the FRC to avoid passing on a toxic legacy to its successor.
Among the risk elements singled out by the LAPFF were conflicts of interest, potential breaches of public procurement rules for legal services, and potential claims against the FRC for regulatory failings.
LAPFF members told the review – led by top civil servant Sir John Kingman – that they wanted to see the FRC’s existing responsibilities for accounting standards, enforcement and corporate governance hived off into separate bodies on a statutory footing.
Baroness Sharon Bowles, a member of the UK parliament’s upper house and former chair of the European Parliament’s Economic Affairs Committee, also submitted evidence to the Kingman review.
In it, she echoed the LAPFF’s call to put the FRC, or its replacement, on a statutory footing with full accountability to parliament and an explicit duty to act in the public interest.
She also called for the watchdog to be stripped of its responsibility for accounting and auditing standards, arguing that this conflicted with its regulatory oversight functions, creating a “toxic feedback loop”.
Baroness Bowles also accused the FRC of being a “cheerleader for things in both IFRS and in company law that have caused the kind of problems that are coming to light”.
The embattled organisation has, however, received backing from other bodies for it to continue in its role as the UK’s audit and corporate governance regulator.
In its submission to the Kingman review, the Institute of Chartered Accountants of England and Wales (ICAEW) argued that the FRC was “the right body” to “represent the UK’s interests and to promote international regulatory and investor confidence in accounting, auditing and corporate governance in a post-Brexit world”.
In contrast to other respondents, the ICAEW rejected the charge levelled at the FRC by politicians in the wake of the collapse of outsourced services provider Carillion that the watchdog’s oversight was characterised by “feebleness and timidity”.
The institute argued: “On the contrary, we have encountered examples of FRC firmness over the years, and there have been moments of marked disagreement between us. The FRC’s enforcement team has, in our view, on occasion demanded excessive sanctions.”
In response to criticism that it is too soft on those it regulates, the FRC has recently beefed up its disciplinary processes. In June, it fined and reprimanded auditors PwC and the firm’s former partner Steve Denison over shortcomings in the 2014 audits of BHS and its parent company Taveta.
An FRC spokesperson told IPE: “The FRC awaits with interest Sir John Kingman’s final recommendations after he has concluded his review of all the submissions to his inquiry. We are not commenting on any individual responses to the inquiry.”
Both PwC and KPMG declined to release their submissions to the Kingman review. Neither EY nor Deloitte responded to a request for their submissions.
According to a document obtained by IPE from the UK’s Department for Business, Enterprise and Innovation, which sponsors the FRC and its activities, the inquiry has no plans to publish submissions to the inquiry.
The Kingman review is expected to publish its findings in the coming months.
The Kingman Review of the FRC’s role was announced in April following a wave of criticism of the accounting industry regulator. It was accused of a number of conflicts of interest and of being too close to the companies it polices to be an effective deterrent and watchdog.
Last year, IPE reported how the FRC had been attempting to avoid classification as a public body since 2004, and so avoid many of the disclosure rules this would involve. This prompted dozens of questions to the government regarding the FRC’s operations from Baroness Sharon Bowles.