Kingman Review says FRC should be replaced 'as soon as possible'

The UK’s accounting watchdog has come under fire from an independent review, which has called for its urgent replacement. The Financial Reporting Council has come in for mounting criticism in the past year, and now the investigation led by Sir John Kingman has determined the entity should be succeeded by an independent statutory regulator.

Over the past five years, the Big Four’s share of FTSE 350 auditing expanded from 95% to 98%, in spite of a series of supposedly stringent reforms from the EU and UK aimed at tackling a lack of competition in the sector since the 2008 financial crisis. Fears of both monopolisation and conflicting interests have both grown through 2018, meanwhile, as all of the Big Four were implicated in the collapse of Carillion. These fears are precisely why ‘breaking up’ the Big Four in the UK has suddenly become a major talking point among Britain’s politicians.

While the concerns surrounding the top names of the auditing and advisory game are well known, however, another twist to the story has seen heightened criticism levelled at the market’s regulatory bodies. The Competition and Markets Authority, which was involved in high profile probes of both the auditing and the fiduciary consulting markets was lambasted for having yielded “a paper tiger” for its investigation into the latter. Meanwhile, the Financial Reporting Council’s ability to moderate the accounting scene was called into question following a growing number of scandals in the sector, including the collapse of outsourcer Carillion.

In 2018, this led the UK Government to task former Treasury bureaucrat Sir John Kingman with the undertaking of a review of the FRC itself. Now, following a term of intense deliberation, the Kingman Review has come to the conclusion that the FRC – which Kingman referred to as being like a “rather ramshackle house” – must be replaced with a new statutory regulator with “the interests of consumers of financial information, not producers” at its heart.

Addressing the recent scrutiny of the FRC, Kingman said he felt some critics overstated their case, but he had “sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work… The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world.”

The report, which was handed to the Government at the turn of the year, suggested that a new body – potentially named the Audit, Reporting and Governance Authority – should be accountable to Parliament, have clarity of purpose and mission, new leadership, and new powers to keep pace with a fast-changing market. In total, the Kingman Review made a huge 83 recommendations, which also included the ending of self-regulation in the auditing sector through trade associations, and for reviews of audit quality and corporate reporting to be made public.

Commenting on the report, Business secretary, Greg Clark, said, “The Government will take forward the recommendations to replace the FRC with a new independent statutory regulator with stronger powers. This body will build on our status as a great place to do business, and form an essential part of the government’s efforts to grow trust and public confidence in business and regulations.”