The search for a new chair for the Financial Reporting Council is a golden opportunity to appoint a leader from the ranks of financial reports users, believes Jane Fuller
This article was first published in the July/August 2020 UK edition of Accounting and Business magazine.
The UK’s Financial Reporting Council (FRC) suffered an apparent setback in May when Simon Dingemans resigned as its chair after only eight months. I view this as an opportunity to appoint a leader whose background lies in the regulator’s core constituency: consumers of financial information.
The list of people with a stake in honest reporting by companies is a long one, but those in the investment industry remain the primary audience as the FRC transforms itself into the Audit, Reporting and Governance Authority (Arga).
Chairing a body in transition, with the recommendations of three reviews ringing in its ears, is a daunting task.
It will start with reconstruction of the board. Once a body of 14, only seven were serving in early June – and three of those were approaching the end of their tenure. Another five or six need to be found over the next year or so.
A revised structure for the FRC has been set out in the Strategy 2020/21 document. The model is functional rather than following the disciplines of accounting and auditing, corporate governance and the actuarial profession.
The crucial role of enforcement is crystal clear and has already led to a step-change in sanctions. A litmus test will be the outcome of the Carillion investigation.
The pivotal division is supervision, the new name for the conduct committee. With its headcount set to rise by 50% to 149 by March 2021, this is by far the biggest division. Supervisory activity cascades through the ‘key outputs’ sought by the FRC’s board, including monitoring adherence to the flagship codes.
What may be compromised in the functional approach is pursuit of excellence in the disciplines. The advisory councils on standards (I served on the audit and assurance council) may fall away, but in any case they lacked clout. They had neither a direct line to the board nor formal involvement in quality reviews.
Joined-up thinking is tricky because practising professionals work for firms that are subject to these reviews. Yet if you exclude them from the regulatory forum, you lose expert voices.
Strong executives are needed to ensure that pursuing professional excellence does not get lost in the supervisory process.
Such excellence is also essential if the UK is to influence international standards-setting. So, it is confusing that the post-Brexit UK Accounting Standards Endorsement Board is set to carry out thought leadership and influencing roles independently of the FRC.
But the most sensitive relationship that the chair will have is with the Department for Business, Energy and Industrial Strategy. This is a more political overseer than the Securities and Exchange Commission in the US. Keeping the FRC/Arga robustly independent in pursuit of its investor-driven purpose will be the bottom line.
Jane Fuller is a fellow of CFA Society of the UK and co-director of the Centre for the Study of Financial Innovation.
"Chairing a body in transition, with the recommendations of three reviews ringing in its ears, is a daunting task"