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An institutional share-owners group has locked horns with the U.K. Financial Reporting Council (FRC) over the regulator’s implementation of U.K. legal requirements on financial reporting and accounting.
Pensions & Investment Research Consultants Ltd. (PIRC), a London-based company, charged in a document submitted to a House of Commons committee that the council has failed to exercise its enforcement authority under the U.K. 2006 Companies Act.
FRC, which sets the country’s accounting, auditing and actuarial standards, responded in a letter to PIRC published Dec. 23 that the company has fundamentally misinterpreted the council’s enforcement powers.
The dispute centers on sections of the 2006 law that govern corporate disclosures and accounting requirements. It is part of a larger debate on corporate governance among U.K. regulatory authorities and policy makers that could affect how U.K. companies are regulated.
One part of the 2006 Act, known as Section 172, addresses directors’ duties to promote a company’s success, which include preparing a strategic report.
Companies that aren’t considered small under U.K. law must publish a strategic report designed to inform shareholders about their business models and strategies.
Section 393 of the Companies Act requires directors to ensure that company accounts provide a true and fair view under accounting standards.
FRC said it has confirmed that the true and fair requirement “remains of fundamental importance” in applying international financial reporting standards and U.K. Generally Accepted Accounting Practice.
Both FRC and PIRC presented testimony to the House Business, Energy and Industrial Strategy Committee during a November inquiry on corporate governance. PIRC provided supplementary written evidence to the committee on Dec. 5.
PIRC charged that FRC is failing to adhere to the 2006 law and has published guidance on preparing strategic reports that misleads companies.
“The effect is that whilst Company Law is setting ’signposts’ in one direction, the FRC has been setting signposts in different directions,” PIRC said.
FRC countered in its reply that it is doing all it can to enforce the law but that it lacks the authority to meet all of PIRC’s regulatory demands, such as requiring separate company reporting on dividends policies under Section 172.
“Your evidence suggests a misunderstanding of the meaning of the relevant parts of company law related to directors’ duties and the strategic report, and the purpose of the FRC’s Guidance on the Strategic Report,” according to the council’s letter to the PIRC.
FRC and PIRC also clashed over the implications of Section 393’s requirements for true and fair financial reporting.
In drafting its guidance and standards, the council has omitted some provisions of the law and put in new ones, PIRC said.
The FRC’s June 2014 statement on applying the true and fair requirement dovetails with the U.K.’s legal framework, the council said.
“We therefore disagree with the view that the FRC is transcribing legislation wrongly and taking a different approach in its standards and guidance” than the law requires, the council’s letter to PIRC said.
On a broader scale, PIRC accused the council of conducting its affairs with a basic conflict of interest.
The council has used an FRC board member for its legal work, the company said, and “we believe it wholly unsatisfactory for the FRC to use any lawyers or barristers with links to the accounting profession setting standards or giving guidance.”
PIRC called the council in its current form “unsupportable.”
FRC said it strongly refutes arguments that the decisions it makes are influenced by conflicts of interest, and said it sets and follows strict principles to safeguard its independence.
The council charged that PIRC’s attacks are damaging efforts to make company financial reporting more accountable.
“It is disappointing that you continue to pursue an agenda which in our view undermines confidence in corporate reporting,” FRC said.
Looking ahead, the council said in its letter and testimony to the committee that it would seek parliamentary authority to broaden its enforcement powers.
FRC can pursue sanctions against accountants, it said, but not against company directors, who might be just as culpable for misconduct but whom the council can’t sanction because they’re not members of the accountancy profession.
“The gaps need to be closed,” the council said.
FRC also has called on Parliament to beef up financial reporting requirements under section 172.
The government’s recent paper on corporate governance reform, it said, offers the opportunity to consider improving how the section is implemented.
The council in 2017 will assess possible enhancements to its corporate governance code, which comprises both general principles and specific requirements for boards of directors of companies with a premium U.K. listing of equity shares.
FRC also will consider next year revamping its guidance on preparing strategic reports.
To revise the governance code and the guidance on strategic reports, however, “there may be some areas where legislative changes are required.” the council said.
To contact the reporter on this story: David R. Jones in London at email@example.com
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The FRC letter is available at https://www.frc.org.uk/Our-Work/Publications/FRC-Board/FRC-Letter-to-PIRC-Managing-Director-Alan-MacDouga.pdf.
PIRC's supplemental written evidence is available at http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/business-energy-and-industrial-strategy-committee/corporate-governance/written/44407.pdf.
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