THE FINANCIAL REPORTING COUNCIL is being hamstrung in its ability to investigate corporates suspected of misconduct because it lacks the necessary investigatory powers. Government needs to give the reporting and governance watchdog some sharper teeth.
Once again the FRC appears late to the party. Having said it is “closely monitoring the situation” at Tesco following the retailer’s shock revelation that it overstated its profits by £250m, the FRC is unlikely to launch a formal investigation until Deloitte – commissioned by Tesco – has carried out an independent inquiry. The Financial Conduct Authority has already begun an investigation into Tesco and will start by examining whether the company broke rules on accurate financial disclosure.
The FRC has disciplinary powers in relation to misconduct by accountants and, through the Financial Reporting Review Panel, can also require a company to restate its financial statements. But what it lacks are powers to monitor or require restatement of unaudited trading statements. Nor does it have the power to take financial statements and internal documents from the companies themselves.
As a corporate watchdog, the FRC must be granted powers to compel companies to open up access to internal documents, rather than the voluntary basis that currently exists. Otherwise it will lag behind other regulators and will continue to lack the necessary firepower required of a robust and authoritative regulator.
Nevertheless, the FRC is increasingly baring its teeth. It has overhauled its unwieldy structure, beefed up its disciplinary processes and severity of its sanctions, while being handed enhanced duties – not all of them wanted – in inspecting the audits of FTSE 350 companies while it also plans to, essentially, ‘name and shame’ companies that are investigated for failing to provide accurate information in corporate reports.
Under the rules, which have been put out to public consultation, companies will be forced to admit when their accounts have been subject to an inquiry by the FRC’s conduct arm.
FRC’s trial by tribunal
Much will hinge on the outcome of the FRC’s struggle with Deloitte over work the Big Four firm carried out at MG Rover. The FRC slapped Deloitte with a record-breaking £14m fine last year – the first to be fined under the FRC’s new sanctions guidance, which can ask tribunals to take into consideration one or various aspects of a firm – such as profitability of partners or firm, market share or revenue – when calculating fines.
The firm had lost a tribunal in July over its role in advising the owners of MG Rover. Deloitte and its corporate finance partner Maghsoud Einollahi were hauled in front of the FRC’s independent tribunal for its role in advising the owners of MG Rover in 2000 over two transactions. The findings and fine are currently being appealed, and the outcome will say much about whether the FRC’s is a reporting watchdog with real bite.
Richard Crump is deputy editor of both Financial Director and Accountancy Age