Update on the FRC Transformation Programme
01 May 2020
The Financial Reporting Council continues to make progress on our journey towards becoming the Audit Reporting and Governance Authority (ARGA) by taking forwards work on the recommendations of the Independent Review of the FRC, The Competition and Markets Authority (CMA) review and Sir Donald Brydon’s review into the quality and effectiveness of audit.
This update provides some details about the progress made so far and the expected next steps. The FRC’s combined Transformation Programme comprises of six workstreams that will drive the FRC’s delivery the recommendations across all three reviews as one holistic programme.
The six workstreams are:
- Setting up the new regulator
- Audit scope & regulation
- Corporate regulation
- Corporate reporting
- Corporate governance
- Market reform
While primary legislation is required to create ARGA and to give it formal powers, the FRC continues to work closely with the Secretary of State and BEIS to find ways to take forwards many of the recommendations without legislative changes.
What have we achieved so far?
A formal plan is in place to streamline the governance of the FRC. A two-tiered system will replace the current three tiers of committees and councils. More of our decision-making is being be led by the Executive. The number of Board members has reduced and will be refreshed through natural changes in rotation, producing leaner decision-making and oversight arrangements. This new governance structure is due to be implemented in January 2021.
At an operational level we have adopted The Regulators’ Code and Managing Public Money and internal FRC operation – including voluntary extension of FOI against all our activities, not just our partial designation under law. We have enhanced our complaints handling processes, enhanced our economics and analytics team to develop our market intelligence and published an updated budget and strategy for the 2020 financial year.
The audit sector is faced with a clarion call to improve audit quality following the CMA and Brydon reviews. To make progress in advance of legislation, the FRC has developed thinking on mandatory managed shared audits, which will enable ‘challenger’ firms to participate in the audits of larger companies. The FRC’s Audit Firm Monitoring and Supervision (AFMAS) team is developing principles for the operational separation of their Big 4 firms’ audit practices, which will ensure people in the audit practice are focussed above all on the delivery of high-quality audit. It is also continuing to develop thinking on the legislation that may be required for this measure to support BEIS’s audit reform programme.
We are reviewing the format of our individual Audit Quality Review reports with a view to publishing them from the 2020/21 inspection cycle with the consent of the audit firm and the entity. This is one of Sir John Kingman’s key recommendations to improve transparency to the market about the quality of audits. If companies or their auditors do not give consent for us to publish the report, the FRC proposes to publish an anonymised summary of the report as an alternative way to bring this transparency in advance of legislation.
The FRC’s revised UK Stewardship Code took effect at the start of 2020 and sets substantially higher expectations for how investors manage money on behalf of their clients and beneficiaries. The Code now focuses on the activities and outcomes of effective stewardship, which addresses Sir John Kingman’s review recommendation. The Code now extends to all asset classes and includes environmental and social issues. Reporting will begin in 2021 and this year we are engaging with prospective signatories to communicate our expectations.
A number of recommendations specific to Enforcement have already been implemented, including greater transparency through the publication of the FRC’s Annual Enforcement Review. The FRC continues to work with BEIS to implement the recommendations for ARGA’s new enforcement powers, in particular greater powers to hold non-accountant directors to account for their duties in relation to financial reporting.
- We will continue to talk to key stakeholders about their priorities for ARGA and we will work with BEIS on plans for future consultation and legislation.
- We will identify other reforms which can be prioritised without further BEIS consultation or legislation. In doing so, we will pay careful consideration to the impact of Covid-19 on the audit market, our stakeholders and the wider economy to ensure that any reforms are delivered in a proportionate way.
- We will provide evidence to the Business Select Committee’s inquiry on Delivering Audit Reform.
- We will enhance AQR and Corporate Reporting Review (CRR) processes and increase the scope and number of reviews by both teams for this year.
- We will progress plans to take on decision-making responsibilities for Public Interest Entity (PIE) auditor registration.