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 http://www.frc.org.uk/images/uploaded/documents/Draft%20Plan%20and%20levy%20proposals%202010-11%20FINAL.pdf 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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