Auditors: Market concentration and their role - Economic Affairs Committee Contents

CHAPTER 4: The Legal/Regulatory Framework

Current regulatory structure

99.  Accounting regulation is handled by a complex, multi-layered web of organisations. Frontline regulation is primarily handled by six professional bodies:

  • Association of Chartered Certified Accountants (ACCA)
  • Chartered Institute of Management Accountants (CIMA)
  • Chartered Institute of Public Finance and Accountancy (CIPFA)
  • Institute of Chartered Accountants in England and Wales (ICAEW)
  • Institute of Chartered Accountants in Ireland (CAI)
  • Institute of Chartered Accountants in Scotland (ICAS)

100.  These bodies investigate complaints against their members and where necessary discipline them. Where complaints are upheld they can issue reprimands, fine the auditors (or their firm) or suspend their right to practise. They also promote the interests of their members including their monopoly rights to practise, licences to practise and continuing professional development.

101.  Attempts by the professional bodies' leaderships to effect mergers have been rejected each time by the members of at least one of the bodies involved. Mr Iain McLaren, Senior Vice-President of the Institute of Chartered Accountants in Scotland (ICAS) justified the fragmented set-up on the grounds that the organisations "compete vigorously" on training. He said: "No one in this day and age likes to have a sole supplier [and] what we hear from our members currently is that they would not welcome any consolidation."[136] There has been no regulatory or governmental pressure to rationalise professional associations.

102.  However in the 1980s unease about possible or actual conflict of interest while these professional bodies were in effect self-regulating trade associations led to the setting up in 1990 of the Financial Reporting Council (FRC) as the UK's regulator responsible for promoting high quality corporate governance and financial statements. Its chairman and deputy chairman are appointed by the Secretary of State for Business, Innovation and Skills.[137] There is extensive representation of the accountancy profession on the FRC. The professional bodies retained some disciplinary roles while the FRC oversees regulatory activities of the professional accountancy and actuarial bodies and operates independent disciplinary arrangements for the more serious, public interest cases.

103.  The FRC also sets and/or adopts financial reporting and external auditing standards. In corporate governance, the FRC's remit is largely limited to drafting the UK Corporate Governance Code and Stewardship Code. It conducts very little monitoring and no enforcement of these pieces of discretionary guidance. Listed companies are however required to report on how they have applied the Corporate Governance Code in their annual report and accounts and, if necessary, explain which parts they have not complied with.

104.  Their prominent role in the FRC, coupled with their professional bodies' dual role as supervisors and trade associations, led the Committee to inquire if accountants and auditors—in particular the Big Four—are too influential over their own regulation, especially when nine of the fourteen members of the FRC's Auditing Practices Board (APB)—which sets and/or adopts audit standards—are current or past members of Big Four firms. Although no current members of the Big Four firms are on the FRC's main Board, past and former members are well represented on its other boards.

105.  We asked if the supervisory and regulatory bodies had been captured by the profession. Mr Steve Cooper of the International Accounting Standards Board (IASB) said: "We are certainly not captured by the auditing profession. We obviously meet the auditors on a very regular basis. We meet with the technical partners. Clearly, they are the ones who have to interpret the standards that we issue and apply them in practice. It's vital that we make sure that we meet them. We certainly don't ignore their opinions. Their opinions are very, very important."[138] Mr Robert Hodgkinson, Executive Director of the ICAEW, dismissed the idea they were dominated by the Big Four.[139]

Changes to the regulatory structure

106.  The FRC is keen to gain more powers. It would firstly like to introduce an additional licence for auditors of listed companies. This would give the FRC the power to impose a range of sanctions against individual auditors which it currently cannot do. At present, the FRC's only option is recommending the relevant professional body remove the licence of the entire audit firm—not just the individual auditor(s). Removing a firm's licence is "a nuclear option", according to FRC chief executive Stephen Haddrill. But even if the FRC recommends such a drastic step, it cannot enforce the action. Mr Haddrill said: "We would expect [the professional body] to enforce it but we don't have that power."[140]

107.  After gaining a licensing role the FRC wants "a wider range of sanctions to address shortcomings in audit quality and for use in disciplinary situations".[141] These would include being able to set conditions on how an erring audit firm does business in future and to set fines.

108.  The FRC also wants more power to conduct preliminary investigations. Mr Haddrill said: "At the moment it's quite difficult for us to conduct a comprehensive investigation into whether or not there has been an audit failure, if we don't have some real hard evidence of that being available. We have very limited powers to call into account and to question directors, for example, unless they happen to be accountants. So we find it quite hard to get a thorough review of whether something has gone wrong and would like our investigatory powers to be strengthened in that respect."[142]

109.  The FRC argues for these changes on the grounds that too many audits seen by its Audit Inspection Unit (AIU)—which monitors the audits of all organisations in whose financial condition there is considered to be a major public interest—are substandard.[143]

110.  The regulation of accounting and auditing is fragmented and unwieldy with manifold overlapping organisations and functions. This is neither productive nor necessary. Other professions have only one regulator—medicine for example under the General Medical Council. The wider powers sought by the Financial Reporting Council would go some way to simplifying and streamlining matters for audit. But further impetus needs to be given to rationalisation and reform. We hope and expect that the profession will provide that impetus. In the absence of rapid progress, we recommend that the Government stand ready to impose a remedy.

136   Q 51. Back

137   The FRC is not a costly quango to the public purse, with less than 10% of its £13m annual budget being funded by government, the rest being levies upon interested parties-see Financial Reporting Council, (December 2009): Draft Plan and Levy Proposals 2010/11, at Back

138   Q 462. Back

139   Q 78. Back

140   Q 172. Back

141   ADT 24. Back

142   Q 172. Back

143   ADT 24. Back

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