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Britain’s audit watchdog a ‘sheriff of half a county’ beholden to accountants

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A delay in creating a tougher British auditing regulator means the current watchdog is “sheriff of only half a county”, beholden to the goodwill of accountants for funding and data, lawmakers were told.

After the collapse of builder Carillion, retailer BHS and cafe chain Patisserie Valerie, three government-backed reviews proposed in 2018 and 2019 sweeping changes to auditing and corporate governance, including a new Audit, Reporting and Governance Authority (ARGA).

ARGA would replace the Financial Reporting Council (FRC), armed with more powers to deal with powerful accounting firms, such as EY, PwC, Deloitte and KPMG, the “Big Four” that dominate auditing of listed companies. However, several years later the government has yet to introduce legislation to set up the new watchdog.

FRC Chief Executive Richard Moriarty told parliament’s business committee that the watchdog has come a long way in implementing many of the recommendations from the reviews, but “serious gaps” remaine that needed filling with legislation.

For example, company directors are not held to the same standard of accountability as accountants as the FRC can only punish directors who are qualified accountants.

The regulator is also “beholden” to accounting firms for information used in investigations, whereas other regulators can demand data, Moriarty said.

The watchdog has no competition powers and also has to “beg in a voluntary way” for about 40% of its income.

“At the moment I’m sheriff for only half the county,” Moriarity said, adding that he was asking for powers other regulators already had.

Business minister Kevin Hollinrake said significant progress has been made by the FRC using existing powers to improve audit quality under new leadership.

“Legislation is a last resort, rather than a first resort, I would say. We are not in a crisis situation,” Hollinrake said.

“We want to make sure we don’t put undue burdens on businesses.”


The government unexpectedly pulled draft rules from parliament in October that would have applied some of the lessons from Carillion and BHS.

It also gave the FRC a new remit to consider Britain’s competitiveness, and the watchdog later ditched proposals to toughen corporate governance rules for listed companies after heavy lobbying by the London Stock Exchange.

John Kingman, who chaired one of the three government-backed reviews, told lawmakers that without ARGA there was a risk of falling back on improvements made at FRC.

“The house has been impressively rebuilt… but it’s still on inadequate foundations,” he said.

“The peril of that is they are up against large vested interests, and they have to operate through suasion and not by power,” Kingman said.

The FRC announced in March it was freezing staff expansion plans due to the legislative delay in transforming it into ARGA.

As its establishment moves “further over the horizon”, the audit reform to bring vibrant competition is slowing down, Scott Knight, Head of Audit and Assurance at accountants BDO told lawmakers.

It means change will “take decades”, said David Herbinet, Head of Audit and Assurance at accountants Mazars.

Huw Jone Reuters