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Paul Boyle, chief executive, Financial Reporting Council

With the dawning of 2005, the introduction of international financial
reporting standards is no longer in the distant future. It’s this financial
year; it’s now. Calculating profits and balance sheets under IFRS has gone from
being a theoretical exercise, a dry run, to being the prevailing regime for this
year’s results. Sure, there’s still the not-so-little matter of the 2004
accounts to finalise – for listed company FDs, their last ever under UK GAAP.
But they know that the hedging strategies, the pensions black holes and the
employee share schemes that are now in place, will affect their first set of
numbers published under IFRS. And the Financial Reporting Council is watching.

Paul Boyle, installed as chief executive of the FRC in 2004 when it was
equipped with a fistful of new responsibilities, has set a target of reviewing
some 300 sets of company accounts in his first year. When it was first set up 15
years ago, the FRC’s accounts scrutiny unit, the Financial Reporting Review
Panel, had no authority to examine annual reports unless someone had lodged a
specific complaint. In 2003, however, the government decided to give the FRRP
the authority to be proactive rather than reactive after conducting a series of
post-Enron enquiries into the state of financial reporting and auditing in the

But what is the FRRP looking for? “The short answer is, we’re looking for
accounts that don’t give a true and fair view, and don’t comply with the
accounting standards,” says Boyle. “That can show itself in a number of ways.
Our risk model helps us identify from historical experience what circumstances
have been associated with accounts that have been mis-stated.”

The risk-based approach is imperative: with some 1,200 quoted companies in
the UK, the Panel needs to focus on finding “a way of focusing our resources on
the areas of greatest risk”.

The risk model has many components – the type of industry, issues driven by
new or particularly complicated accounting standards, previous ‘form’ on the
part of a particular company or its management, even whether a company is
struggling financially (which increases the temptation to inflate reported
profits) or is spectacularly successful, in which case the question is, ‘Why?’
The Panel will also be looking at analysts’ circulars for any hints of suspicion
about company accounting. To help make sense of all this, the FRRP will invest
in technology that manages a risk database, concentrating the FRRP’s efforts on
the 300 or so accounts that might pose problems the auditors have overlooked.

Most companies probably won’t even know their accounts have been scrutinised
by the FRRP. If the Panel has any queries, however, then it will write to the
company seeking clarification or explanation. If an answer comes back to the
Panel’s satisfaction the matter will be closed, with no one in the outside world
knowing about the discussions.

In the extreme case, where a company has failed to follow proper accounting
standards, the Panel has the right to seek a court order to force that company
to re-issue a correct set of accounts. “In practice,” says Boyle, “it has never
been necessary to go that far. The directors have always agreed they would make
changes voluntarily. If the court does make such an order, the directors have to
pay for the cost personally.”

IFRS adds something extra to the mix. The first full, audited, IFRS-based
results won’t be announced until early 2006 (AstraZeneca is a recent exception),
though the FRRP does now have the authority to scrutinise the quarterly and
interim results that will start to come out from April 2005 onwards.

How worried is Boyle about the transition? “I think it’s hard to imagine a
change of this size going through without some glitch,” he admits. “But I think
people also recognise it’s a big change and people are going to be crawling all
over these numbers: finance departments, auditors, audit committees, investors
will all be paying a lot of attention to the numbers. That’s likely to result in
a good transition.

“But some things could go wrong, and if a company does subsequently discover
it has made an error in how it has handled the implementation of the new
standards, the worst thing they could do is try to cover that up. They’d be
better off putting their hands up and explaining what the problem was, and what
the correct numbers should be,” Boyle advises. “I think people will generally be
more appreciative of that honesty (if companies say), ‘This is a complex
exercise and we screwed up. Here are the correct numbers.'”

The work of the FRC is more wide-ranging than ensuring compliance with
accounting standards. Boyle has developed a one-line mission statement for the
FRC, ‘Promoting confidence in corporate reporting and governance’, and it’s
printed on the back of Boyle’s business card. The FRC also still has the
Accounting Standards Board, whose role looks increasingly at odds with the drive
towards international accounting standards, but was given a fistful of other
responsibilities as well. From what was known as the Accountancy Foundation, the
FRC has now taken under its wing the Auditing Practices Board and the
Professional Oversight Board for Accountancy (formerly The Review Board), which
has a new section called the Audit Inspection Unit. The new Accountancy
Investigation and Disciplinary Board will take over from the Joint Disciplinary
Scheme. The Council of the FRC also looks after the Combined Code.

Taken together, this mix of rule-making, investigating, enforcing and
disciplining either makes the FRC one of the most joined-up regulators in the
business, or a recipe for conflicts of interest. Boyle makes the point that the
mission statement deliberately says “corporate reporting”, not “financial
reporting”. He adds that, when he was interviewed for the job, he said that the
new FRC had to be more than the sum of its parts: “If you look at any of the
major scandals in recent years, whether it’s Enron, WorldCom or Parmalat, they
all have a mixture of financial reporting, auditing and corporate governance
elements in them,” he says. “One of the things that makes the FRC unique
internationally is the breadth of its responsibilities. Each of the different
parts of the FRC – whether it’s the Accounting Standards Board or the Auditing
Practices Board or the Review Panel – all make a contribution towards that
overall aim of confidence in corporate reporting.”

He argues that if regulation is going to make sense, “you have to be aware of
what impact the rules you’re setting will have. If you take someone who’s only
responsible for setting rules but not for overseeing the way in which those
rules are enforced, that can lead to some adverse consequences.”

He acknowledges that there would be a conflict of interest within the FRC ”
if the enforcement were being made by the same people who set the rules. Then
there would be a danger that their judgement on a particular case would be
biased by the need to demonstrate what the rules they set should have meant as
opposed to what the words of the actual standard are.”

But Boyle counters that the separation of decision-making between the
different boards takes care of any such conflicts. “The people who sit on the
FRRP, for example, are able to take an independent assessment about whether a
company is complying with accounting standards quite independent from the
Accounting Standards Board, which sets the standards. The same is true in
relation to investigation and disciplinary action.”

Much of the work of the FRC is based around not just the reported numbers but
the quality of the audit (though while the FRC may be auditing the auditors
there is no legal basis for suing the FRC’s sponsor, the DTI, even if it does
have deeper pockets than any audit firm). But where, in Boyle’s view, do audits
go wrong? “The key issue for auditors is maintaining an objective view of what’s
happening in the company,” he says. “If you’re working your socks off to make a
business commercially successful, if you’ve been closely associated with the
strategy and the policies of that company, your natural instinct would be to
look on the bright side of things to assume all will go well.

“It is natural to assume that new product launches will be successful, to
assume that new capital investments will pay for themselves, to assume that
acquisitions you’ve made will give huge profits. And if an auditor crosses that
line between getting to know the business well enough to understand what’s
really happening so they can interpret the numbers and believing in that
company’s prospects, that’s when dangers arise.

“One of the changes the Smith Report has led to is this much greater emphasis
on the relationship between the auditor and the audit committee as opposed to
the relationship between the auditor and FD. The audit committee has more chance
of being independent and objective for the very reason that they’re not working
the business day in, day out.”

Boyle has the right CV for the job. He was chief operating officer at the
Financial Services Authority for six years, had various finance jobs at Cadbury
Schweppes and was group FC of WHSmith “back when it was a good company”, he
jokes, as the retailer’s sorrows play out in the financial press. After gaining
a first-class honours degree in accountancy from Glasgow University, Boyle
picked up a Scottish CA qualification with Coopers & Lybrand.

So his experience as an auditor, finance professional and regulator would
have put his CV at the top of the list of job applicants. And all those roles
have affected how he approaches the job at the FRC. He is very aware of the ”
need to operate with the consent of the regulated community”, he says. ”
Although you can have legal powers and therefore can impose your will on
individual organisations, if the majority of the industry doesn’t believe you’re
operating in a fair and transparent way then your effectiveness as a regulator
becomes substantially reduced. Our philosophy is that the best regulator is, in
fact, a well-informed market.” V We asked Boyle what his message was for the
20,000 FDs who read this magazine: “When the Review Panel does its work, our
ideal outcome is to find that most companies are preparing accounts which show a
true and fair view: that’s the best result for everyone,” he says. “Don’t make
us busy next year.”

For his part, Boyle has promised to return the favour. Yes, there is a review
of the Turnbull guidance currently underway, and there is to be a new standard
for the Operating and Financial Review (see Briefings, pages 39 and 40). There
are also new auditing standards and, of course, FDs are grappling with IFRS. But
Boyle – and the FRC’s recently published Plan and Budget – makes clear that no
new major initiatives are planned for 2005-06. “We have a huge amount of
sympathy for FDs at the moment,” says Boyle. Unusually soothing words for a


? Financial Reporting Review Panel – part of the original FRC but can now
investigate accounts without waiting for a complaint to be filed.

? Accounting Standards Board – also part of original FRC but facing a
changing role as IFRS standards come in and UK standards converge to IFRS.

? Accountancy Investigation and Discipline Board – independent body to
investigate and discipline accountants. In its first major case, Mayflower
Corporation, it is investigating the role of all ICAEW and ACCA members who were
directors, advisers, auditors, employees, etc.

? Auditing Practices Board – responsible for issuing auditing and ethical

? Professional Oversight Board for Accountancy – oversees regulation of the
auditing and accountancy professions, and monitors audit quality in
‘economically significant entities’.

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