Richard Moriarty, CEO of the Financial Reporting Council (FRC) has defended the regulator’s investigations into audit firm misconduct saying ‘fear of enforcement sanctions’ will not make the regulator ‘disinterested’
In a robust defence of the FRC’s disciplinary actions, Moriarty refuted concerns that robust enforcement actions were putting off new talent from joining the audit profession and that current staff were put off from certain areas of the job due to ‘fear of enforcement, sanctions’.
Speaking three months after taking up the top job at the FRC, Moriarty said: ‘I appreciate that the professional bodies, the firms and industry will be more frontline on this, absolutely. But the regulator can’t be disinterested.
‘I’m quite interested in understanding why people think the FRC’s regulatory functions act as a deterrent or a barrier to entry to the profession. Because actually, when you look at the facts, we take very, very few cases against professionals and they tend to be for serious misconduct or, you know, heinous errors of judgment that have had real consequential impacts.
‘So, you know, like most regulators, our enforcement functions are used very sparingly and in rare and significant cases.’
This is in contradiction to what Michael Izza, outgoing chief executive of ICAEW, who is due to retire soon, told the Financial Times last week.
In a surprising statement, Izza said: ‘Prior to 2017 if the FRC brought a case against an auditor, the threshold test that they were looking to meet was “misconduct”. That was lowered to non-compliance with the relevant auditing standards. That is now the lowest of any professional in the UK.
‘If there is a deficiency, and let’s say at one extreme it’s incompetence or outright deception, people should have the book thrown at them. But if the issue is one of judgment… you should be more forgiving than that.’
Moriarty went on to explain that reducing or ‘dumbing down and having a consequence free regulatory zone is not the answer to the attractiveness of the profession. We absolutely have to get the balance right.
‘Let’s be clear here that the public do not expect a consequence free zone from misconduct and serious errors that have a profound impact on the livelihoods of their pensions and communities up and down the country.’
On recruitment, Moriarty stressed that there must be a ‘pipeline of talent coming through’ for future goals to be accomplished on important issues such as public trust and confidence in audit, as well as corporate reporting and governance.
The regulator’s three-year budget has set out plans to freeze its own staff, rather than increasing headcount by 17% as planned last year.
When questioned about the reasons for the decision to stop recruitment, one of the main reasons was the government’s decision to delay legislation to create a new audit regulatory body (ARGA).
Moriarty said: ‘The 1st is the assumption that the realisation of the ARGA is now not as close as we previously forecast and I think we have to reflect that reality.
‘The 2nd is that after years of growth, I think it’s really important to pause and consolidate and make sure we are really focusing on the right priorities, embedding people into the organisation and looking to unlock efficiencies and synergies within the FRC.’
If and when the ARGA is created, the FRC will take over responsibility for local audit supervision.
On the enormous backlog of local audits, which stretches back as far as 2015, Moriarty said: ‘The backlog now measures hundreds and hundreds of audits that have just not been completed, some over several years, and it’s an issue that affects councils up and down the country. Of course, there’s complex reasons for this and no one organisation can solve this on their own.
‘It will require quite a number of organisations to act in harmony and adopt a really can-do flexible mindset to solve this.’
Moriarty makes clear that the issue at hand concerning local audit and the scale of the backlog cannot be solved solely by the FRC. He said: ‘We can coordinate and we can suggest actions for others to take as well as ourselves. But it will require a consistent and coordinated effort and also an enduring effort because I suspect the solution will be measured in years.’
Writes in Accountancy Daily