U.K. Accounting Regulator Plans Major Revamp of Strategy

By David R. Jones

Feb. 11 — The U.K. Financial Reporting Council's planned shift in the coming years from setting standards to ensuring audit quality represents a “sea change” in the organization's agenda, Chief Executive Officer Stephen Haddrill told Bloomberg BNA.

Speaking on the sidelines of a meeting in London on FRC's draft plan and budget for 2016-2017, Haddrill said Feb. 10 the council would move from its recent emphasis on issuing standards—many published in response to the 2008 global financial crisis—to overseeing audits and making sure the current regulatory system works.

FRC, which sets U.K. and Irish accounting, auditing and actuarial standards, has no plans to publish new standards over the next two years beyond implementing the European Union's new auditing requirements, he said during the meeting.

Removing Regulatory Barriers

Instead, the council wants to embed the changes in standards made since the financial crisis, council chairman Winfried Bischoff said in kicking off the proceedings.

“We want to avoid further changes and remove regulatory barriers wherever possible,” Bischoff told meeting participants.

’Ability to Bite.'

FRC supports the Conservative government's agenda for deregulation, Bischoff said, while keeping its enforcement operations strong.

“We need to maintain the ability to bite if necessary,” he said.

The council currently has 20 investigations in progress, including cases involving KPMG Audit plc, Grant Thornton LLP and retail giant Tesco, according to a notice on the council's web site.

Bolstering Audit Quality

Bischoff cited the goal in FRC's 2016-201717 work plan, released in December 2015, of boosting the portion of FTSE 350 audits needing only limited improvements from the current 70 percent to 90 percent over the next few years.

In addition, auditing assessments will zero in on extractive industries and companies servicing extractive industries, as well as companies providing services to the public sector and media businesses.

Highlighting Best Practice

FRC's new regulatory approach will emphasize promoting information-sharing among companies and fostering continuous improvements in audits and best practice, Haddrill said during the meeting.

Work on best practice will include focusing on risk-management reporting and long-term viability statements.

“We'll be looking at risk reporting in the months ahead,” Haddrill said.

Risk Reporting and EU Referendum

The U.K. is currently debating whether to stay in the European Union, and “we can't ignore the fact that an EU referendum is imminent” in the U.K., Bischoff said.

FRC won't take a position on whether the U.K. should leave the EU, he said, but companies should disclose to shareholders the risks to their operations if the nation opts to end its EU membership.

Indicating Principal Risk

Haddrill echoed this view in the interview.

“If they think it's a principal risk to their business, they should state that,” he told Bloomberg BNA.

Haddrill highlighted the similarities for risk reporting that companies faced during last year's failed referendum to declare Scotland a nation independent from the rest of the U.K.

Companies must consider both whether the U.K. breaking from the EU poses a risk to their operations, Haddrill said, and whether a separation is “close to crystallizing.”

Other Priorities

Promoting great transparency in the judgments that companies use in preparing financial reports and implementing changes to U.K. and Irish Generally Accepted Accounting Practice also rank high on FRC's agenda, Haddrill said during the meeting.

Further, the council will work to influence international standards through collaboration with the International Accounting Standards Board and other standard setters.

In particular, the council wants IASB to adopt International Financial Reporting Standard 9: Financial Instruments as soon as possible, he said.

Implementing EU Regulation

A key challenge for FRC over the next several months will be acting as the government's designated competent authority in putting into effect the EU's audit regulation and directive (ARD), which takes effect June 17.

Several meeting attendees questioned FRC's proposed approach to implementing the policy by copying large amounts of ARD language directly into U.K. requirements.

’Less Risky Than Interpreting It.'

Haddrill in the interview defended this strategy, saying the council didn't want to go much beyond what the EU requires.

Copying ARD language into U.K. requirements “can be less risky than interpreting it,” he said, pointing out that excessively broad interpretations could open the U.K. to challenges from EU authorities.

FRC intends to conduct workshops with stakeholders on the new requirements and will consider proposals for further guidance, council executive director for codes and standards Melanie McLaren said during the meeting.

Private Investor Concerns

The council is looking to work more closely with investors, Haddrill said during the meeting, but several attendees charged that FRC emphasizes talks with institutional investors while giving short shrift to the views of private investors.

“We consider engagement with private investors important,” Haddrill responded.

FRC Budget

“During 2016/17 we will change our expenditure categories to reflect our new ARD responsibilities and the new funding model we will introduce to meet the costs of audit regulation,” according to the work plan.

FRC's costs for audit regulation would be shouldered entirely by the auditing profession, Haddrill noted during the meeting.

FRC's total budget would fall slightly from 33.7 million pounds ($48.7 million) in 2015/16 to 33.5 million pounds over the next two years.

“The budget will allow us further to invest in staff development, including to implement the changes to the way we pursue monitoring, our extensive work to influence EU and international developments,” and the council's Internet technology and other infrastructure, the work plan said.

Target for Issuing Plan

FRC is accepting comments on its 2016/17 work plan only through Feb. 12, 2016.

The council has targeted April 2016 for publishing its final work plan and budget.

To contact the reporter on this story: David R. Jones in London at correspondents@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For More Information

The FRC's 2016/17 draft work plan is available at https://www.frc.org.uk/Our-Work/Publications/FRC-Board/FRC-Draft-Plan-Budget-and-Levy-Proposals-2016-17.pdf.