While in theory the move is to be welcomed, the government’s choice of regulator is highly questionable.
Through its inclusion in the government’s Companies (Audit, Investigations and Community Enterprise) Bill announced in November’s Queen’s Speech, the Financial Reporting Review Panel (FRRP) has the power to threaten company directors with jail if they refuse to cooperate with investigations into their financial reporting. The proposed legislation would also allow the FRRP to apply for a court order to release documents related to a company’s accounts. Failure to comply with an order would be punishable by imprisonment or a fine. The bill would also allow the Inland Revenue to pass information on a company’s accounts to the FRRP. Currently, the FRRP can only ask for information requests via the Financial Services Authority.
Yet despite these new measures the FRRP has gained the reputation of being one of Britain’s sleepiest watchdogs. In its 14-year existence it has never prosecuted a company. Only since last year has it had the ability to proactively investigate company accounts rather than act on a complaint. Furthermore, one third of the membership of its panel is made up of representatives of the Big Four accounting firms – the very firms it is supposed to be criticising.
The chairman, Richard Sykes QC used to advise British companies on accounting practices. Ian Brindle, the deputy chairman was a senior partner at the time of the collapse of BCCI, which was the Enron of the early 1990s. Another chunk of its panel is made up of representatives from the FTSE 100 – those companies that the FRRP is supposed to investigate.
The panel’s current annual funding of £300,000 is woefully inadequate to take any company to court or carry out any proper investigation. The panel does not ‘name and shame’ offenders – rather, it puts out a press release that remedial action has been carried out. Lastly, the panel does not have the right to inform shareholders, pension scheme holders or employees of accounting irregularities.
What the panel can do is ask directors to explain apparent departures from the accounting requirements. If it is not satisfied by their explanations, then the panel aims to persuade them to adopt a more appropriate accounting treatment. The directors may then voluntarily withdraw their accounts and replace them with revised accounts. Failing voluntary correction, the panel can take directors to court – though it has never resorted to legal action so far.
Despite these handicaps, the FRRP has gamely tried to flex its muscles in recent months. The panel said in November that out of a trial batch of 20 accounts, eight looked as if they did not comply with current accounting standards, and three showed ’cause for further clarification’. Tellingly, none of the companies or their directors have been named and no action has so far been taken.
But perhaps none of these firms should worry. The largest fine imposed on an audit firm for failing to flag up accounting irregularities in a client’s accounts is just £1,500.
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