Chartered Accountants Regulatory Board

Transcription

1 Chartered Accountants Regulatory Board Response to the joint BIS and FRC Consultation - Proposals to Reform the Financial Reporting Council, October 2011 January 2012

2 Introduction The Chartered Accountants Regulatory Board (CARB) was established in 2007 for the purpose of independently regulating Irish Chartered Accountants. CARB is committed to delivering a high quality risk based regulatory regime, in the public interest. Under the provisions of the Bye-Laws of the Institute of Chartered Accountants in Ireland, CARB is responsible for the regulation of its 20,000 members and 980 audit registered firms. CARB welcomes the opportunity to respond to the matters raised in the joint BIS and FRC consultation (the consultation). European Commission (EC) Audit Reform Proposals Since the publication of the consultation the EC has issued proposals for wide ranging changes to the current Statutory Audit Directive. As these proposals will be subject to debate and it will be some time before they will be implemented we have not, in general, taken these considerations into account when responding to the consultation paper. Major Points CARB notes that the FRC has indicated that it believes reform is needed to: Reinforce the FRC s independence from those it regulates; Improve its efficiency and effectiveness; and Rationalise and minimise the regulatory burdens on market participants. CARB supports such objectives but has a number of concerns which are set out in this response. In preparing this response CARB felt constrained by the fact that many of the proposals did not include sufficient detail to enable it to understand fully how the reforms would be implemented. This is reflected throughout the response. The major points, which are addressed more fully below, are: CARB supports, in principal, the narrowing of the scope of the FRC to capital market companies. CARB does not support the proposed restructure of the FRC in so far as it relates to the Codes and Standards Committee. CARB believes that the FRC should continue to develop codes and standards for all companies (not only public interest entities). CARB agrees that the monitoring and enforcement functions should focus on key public interest areas. CARB believes that the professional bodies should continue to impose sanctions on firms authorised by them subject to the oversight of the FRC. CARB believes that the professional bodies and the FRC should continue to co-operate in the development of the AADB Scheme regulations. CARB agrees, in principle, that a range of sanctions should be available to the FRC. However further consultation on the details of these proposals is required.

3 CARB continues to support transparency in the publication of findings of the AADB and the holding of hearings in public. Response to the Detailed Questions Q1: Do you have any comments on the case for FRC reform as set out in this document? CARB is committed to the public interest and we welcome reform which will deliver this outcome. Unfortunately at this time we do not believe the business case for all the reforms set out in the consultation have been demonstrated. The desire for change at this time is unclear as we remain unsure of the how the problems referred to in the consultation impact upon the actual efficiency and effectiveness of the FRC. Referring to the drivers set out in paragraph 1.5 of the consultation we would comment as follows: (i) Current scope of activity is ill-defined and the structure overly complex: We do not see any evidence that the current structure in any way inhibits the FRC from carrying out its statutory functions, we would however support greater clarification of the FRC s various roles and responsibilities. (ii) The FRC is not sufficiently independent: Whilst noting the illustrations included in the consultation we are unaware, despite regular engagement with the FRC Boards, of any actual difficulties. We would also comment that, in our opinion, continued interaction with the profession and in particular availing of its expertise will contribute positively to the discharge of FRC s functions. (iii) The FRC does not have a proportionate range of sanctions: We are concerned that the proposals relating to sanctions are in conflict with the objective of independence to the extent that they will result in a self-review threat. We also believe that to exercise these powers additional resources will be needed which will increase rather than decrease costs. Having considered the document and impact assessment in detail, we are concerned that many of the proposals may have a contrary outcome and may reduce the FRC s effectiveness and ability to influence. Q2: Do you agree that the proposals will bring benefits and increase the effectiveness of the FRC? We agree that the proposed restructuring of the FRC and its Boards could bring some operational benefits; in our opinion the financial benefits will be minimal. However, we believe these benefits could be achieved within the current structure by providing clarification of the respective roles and functions of the FRC and its Boards. We agree that focusing the work of the FRC on the capital markets, and in particular on the audit of those companies which are traded on a regulated market, should provide more confidence to investors. It therefore follows that all other work which falls outside this scope should be undertaken by the professional bodies and not the FRC thereby avoiding overlaps, additional cost for the market.

4 We do not agree that the proposed restructure of the codes and standard setting activity into a single Codes and Standards Committee will necessarily increase the effectiveness of the FRC. In our opinion any advantages are outweighed by the disadvantages. In our view, the FRC will be unable to attract individuals of the same calibre and expertise as on the current APB and ASB. This could result in a reduction in the quality of codes and standards and the committee itself and hence diminish the influence which the UK currently has internationally in these subject areas. At this time we cannot agree with the proposals set out in relation to additional powers to impose sanctions directly upon registered firms in the absence of proposals as to how this would work in practice. The professional bodies have over many years developed comprehensive regulations to address the imposition of sanctions ensuring that fair procedures apply, including allowing for an appeal mechanism. We do not see that the introduction of such powers will in fact achieve greater independence in monitoring and disciplinary arrangements and we believe that the introduction of such powers may actually result in very serious conflicts for the FRC and reputational damage should a firm appeal against any such sanctions. The public interest is better served by the FRC overseeing the imposition of sanctions by the professional bodies and commenting publicly when it feels these are inappropriate. Q3: Do you have any comments on the consultation impact assessment? Having considered the impact assessment we would comment as follows: The analysis concentrates on financial considerations; it would have been helpful if the assessment had set out the expected benefits of the proposals. It would appear that the savings generated from the restructuring of the FRC are as little as 1% of the FRC s operating budget. We do not believe that this saving is sufficient to justify the proposed changes given the risks noted in our responses to Q2 above and Q9 below. We are concerned that the risks associated with the assumptions made in relation to the FRC s ability to speed up the disciplinary tribunal process are given insufficient weight. In our opinion, by the very nature of the cases under consideration, and the reputation of the firms involved, early settlement of cases cannot and should not be assumed. The overall savings to the regulated community in relation to the narrowing of monitoring powers is likely to be nil as the professional bodies will monitor the areas the FRC does not. Q4: Should the primary focus of the regular FRC activity in relation to codes and standards for corporate governance, accounting and auditing and for monitoring the quality of corporate reporting and auditing, be publicly traded companies and large private companies? The FRC has established an international reputation for its leadership in standard setting; we believe that it is paramount that this continues to be the case. It is therefore our belief that the FRC has a key role to play as the single authoritative standard setter for financial reporting and auditing of publicly traded companies, large private companies and the SME sector. Under the current structure the FRC develops a suite of codes and standards for all companies not only

5 public interest entities and large private companies; we strongly support this continuing to be the case. In relation to monitoring and enforcement functions, as indicated above, we agree that it makes sense to focus the FRC s resources on the key public interest areas. In our opinion the FRC should restrict its activities to those publicly traded companies which meet the definition of a Public Interest Entity as set out in the proposed amendment to the EC Statutory Audit Directive. We would add that we believe it is important that the scope of FRC should be set by DBIS rather that the FRC itself. See response to Q6 below in relation to the AADB. Q5: Is the definition of large private company for this purpose an annual turnover of 500m or more appropriate? Yes. Q6: Should the scope of the FRC s accountancy disciplinary arrangements be narrowed to cover the quality of work and conduct of accountants in relation to the preparation and audit of annual reports and other reports for the capital markets, leaving other cases of potential misconduct to the professional bodies? As noted in our response to Q4 above we agree that the FRC s attention should be focused on capital market companies. In our experience, the remit of the AADB is unclear and there is a danger that it may move outside its current remit, hence clear guidelines are necessary. Q7: Are there other areas of activity from which the FRC could appropriately withdraw? We believe that, in line with its proposals to concentrate on capital markets, the FRC should adhere to this remit and not be distracted by becoming involved in other areas of regulation introduced voluntarily by the professional bodies (for example quality review/practice assurance schemes operating at each professional body). Q8: Do you agree that streamlining the FRC s governance and structure will bring the benefits described. Q9: Do you have any comments on the proposed reformed FRC governance and structure We have found it difficult to respond in any meaningful way to this question in absence of sufficient detail to allow us to understand the proposed new structure. In relation to the proposed restructure of the code and standard setting activity into a single Codes and Standards Board we see no evidence that the effectiveness of the FRC will be increased but we have a number of significant concerns regarding likely negative outcomes of this change. In our opinion the proposed restructure could lead to a reduction in the quality of codes and standards, and thus could damage the FRC s reputation as a standard setter. Our key concerns are as follows:

6 A strong UK national standard setter is necessary to balance the increasing US influence at IASB; it is unclear whether the Codes and Standards Committee and/or the relevant advisory group will have the expertise necessary to represent the UK internationally. It is likely that the FRC will be unable to attract the high calibre of members for the Committee as it did for the APB and ASB thereby leading to a reduction in the quality of the codes and standards. It is unclear how appointments to the FRC Board and Committees will be made. The role of the executive is unclear and should be clarified. It is understood they will have an increasing role to play to ensure efficiency. We accept that accounting, auditing and ethical standards are increasingly international, and that the UK standards are, or are increasingly, based on the international standards. Therefore, there will come a time when the national standard setters will have a reduced and very different role. In time, the FRC will need to address this. The current consultation may be seeking to reflect on these changes, however, this is too early a stage to make the structural changes proposed to UK arrangements in isolation thereby reducing the UK influence at what certainly remains a critical time for the future of financial reporting. Q10: Do you agree that the FRC should be given powers to determine and require a recognised supervisory body to impose proportionate sanctions, subject to appropriate safeguards, on an audit firm and/or individual auditor in respect of poor quality work? Q11: If not, what are your concerns and how do you believe this issue may be addressed. In our opinion the FRC can and does already require the recognised bodies to impose appropriate sanctions, we are unaware of any problems that the FRC has encountered in this regard. We are unclear how this process would work in practice. The professional bodies already have detailed regulations setting out their powers in this area; the FRC would need to develop and consult on any powers it is to be given. We believe that FRC plays a fundamental role in promoting trust in the quality of audits through independent oversight in the public interest. We see this role as being fundamental to investor confidence. We believe that the current division of responsibility is the best way to ensure that the integrity of the oversight body is preserved. The changes proposed could result in considerable problems for the FRC around the principles of natural justice. In relation to the composition of the regulatory committee the most important criteria is that the committee should comprise the persons with appropriate skills and expertise to deal with technical issues before the committee. CARB is committed to adhering to the principles of regulation as well as natural justice and has developed regulations relating to the relevant monitoring functions and regulatory committees to ensure that they are both competent and independent. We do not agree that the consultation makes a case for change at this time.

7 Q12: Do you agree that the FRC should have the ability to make its own rules for the independent disciplinary arrangements without being required to obtain the agreement of the accountancy professional bodies? Q13: If not, how would you propose the FRC demonstrates its independence in this regard? The current arrangements require a high level of engagement between the AADB and the professional bodies, in our experience this engagement with AADB over the scheme has been largely positive. There is no evidence that the current arrangements are not fit for purpose. We believe the current approach has considerable benefits in that it allows for the AADB and the professional bodies to share their experience and expertise. It is CARB s belief that the AADB is fully operationally independent from the profession. It cannot be constitutionally independent of the RPBs from whom it derives its legal authority and by whom it is funded. We do not see that the independence of the AADB is impaired due to its operational autonomy; this could be emphasised in the FRC Annual Report and other pronouncements. To be fully independent significant legislative change, including independent funding arrangements, would need to be out in place. Q14: Should the FRC be able to take more proportionate, nuanced action against a Recognised Supervisory or Qualifying Body and therefore be given a wider range of enforcement powers against the recognised bodies? In particular, should the FRC be able to:- Issue an enforcement order, requiring the body to take specific actions by a specified date, without the need for a court order? Impose conditions on continued recognition as an RSB or RQB? Impose fines on an RSB or RQB and if so at what level There is currently no mechanism for the imposition of regulatory sanctions by the FRC. However our understanding is that the recognised bodies do implement any recommendations made by the FRC as to fail to do so could result in the Minister withdrawing a body s audit recognition. In principle CARB agrees that there ought to be means by which an RSB can be required to implement recommendations without the need for full withdrawal of its recognition, however we are unclear as to what the FRC are proposing. To enable us to make constructive comments we would need information on the business case and detailed proposals on the sanctions and appeal mechanisms. Q15: Should the Companies Act and the AADB Scheme be amended to allow for the conclusion of cases without public hearings where appropriate and where agreed by the parties? The AADB s role is to consider public interest cases. It is therefore difficult to see how it would be in the public interest to not publish the details of the (very few) cases where the matter is agreed by consent. If the matter moves to full hearing the hearing should be in public unless there are express and compelling reasons why it should not. The Disciplinary Bye-Laws under which CARB operates state the following:

8 A Disciplinary Tribunal may only determine that it would be inappropriate to hold a hearing (whether in whole or in part) in public on the grounds that morals, public order, national security, the interests of juveniles or the protection of the private life of any person (including the Respondent or the Complainant) so requires, or there are, in the opinion of the Tribunal, special circumstances where publicity would prejudice the interests of justice. Q16: Do you consider that the FRC should develop a mechanism to enable it to undertake supervisory inquiries into matters of concern, either of individual market events or wider market interest, initially building on its current powers to secure information? We had understood that this is already provided for under current arrangements with the AADB having the ability to call in cases not referred to it by the professional body. It is also our understanding that the AADB has availed of this power. In principle we support the concept of supervisory enquires however there is insufficient detail in the consultation to allow us to comment further. It should be noted that this will bring additional costs; the FRC will need to explain how these costs would be funded.