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All hail the power of the Panel

Financial directors who assume that financial reporting is only being played on the international stage should check out the UK’s Financial Reporting Review Panel, a long-standing part of the Financial Reporting Council (FRC), which has now assumed lead responsibility for corporate governance in the UK.

According to reports from a meeting it held with representatives from the Consultative Committee of Accountancy Bodies in late 2003, the Panel welcomes publicity about its working but much seems to be shrouded in mystery. As part of the post-Enron reforms, the Panel has switched from reactive to proactive in looking at foul-ups in company accounts. But FDs can have little idea how that is actually working in practice.

According to the Panel, it is recruiting five people to perform the analysis of the selected accounts. This is a modest number, compared with the 200 lawyers the SEC keeps on the payroll to crawl over the accounts of US-quoted companies. The recruitment process will take place over the next six months from among technical managers within accountancy or their equivalents.

A key plank of the reforms was a memorandum of understanding between the FRC and the Financial Services Authority. The deal is that, through an annual meeting between the two bodies, the FSA will inform the Panel of the marketplace risks at a broad macro level and the Panel will then assess particular risks. The Panel seems to have been landed with the lion’s share of the work. As well as the relationship between the Panel and the FSA, the FRC has set up an informal advisory group to help the Panel deal with this new phase in its existence. Who is on that informal group, how they were chosen and what advice they are expected to offer is not yet public information.

From the Panel/CCAB meeting, it emerged that the Panel had already started its proactive review of companies. It is unclear whether individual companies will be informed in advance that their reports and accounts are going to be given the once-over. It seems likely that companies will eventually know, although the first news may well be a letter landing on the FD’s desk.

It is also unclear whether there will be a public announcement of the risk factors or the particular sectors that the Panel’s reviewers will examine. It seems that size will matter and that FTSE-100 companies can expect their accounts to be studied as a matter of course.

What particular sectors may be examined could be guessed at by the experience of the fallen heroes of the last few years: telecoms, IT and medical could all make the cut. Everyone seems convinced the risk-based approach can be made to work, although recent accounting scandals do suggest they won’t always fall into nice predictable categories.

The Panel will endeavour to ensure that companies have complied with new accounting standards, especially any that have caused problems or dissent. But with the introduction of IAS, that seems a tall order.

The Panel will be monitoring what the press say about individual companies, so if Financial Director questions a particular company’s accounting policy, it can expect the Panel to take note. And if Financial Director doesn’t give them enough leads, it can expect the Inland Revenue to pass on intelligence about dodgy accounts, thanks again to post-Enron legislation that is currently going through Parliament. That legislation will also give the Panel extra power. It used to have to ask nicely for information from companies and their auditors. Soon it will have a statutory right to obtain the same.

FDs should be clear that the proactive remit extends beyond the numbers in the annual report. The Panel will also have a responsibility to examine interims and the Operating & Financial Review (OFR) when that becomes a statutory requirement. Although the Panel is refusing to worry about how to deal with OFR until it becomes law and there is some clearer guidance from its fellow FRC subsidiaries, the Accounting Standards Board and Auditing Practices Board against which it can benchmark.

The Panel has never had a serious challenge to its authority, working largely behind the scenes with only an occasional press notice detailing how it and quoted companies have come to a satisfactory meeting of minds.

The hope is that the lofty reputation of the Panel and FRC will still mean boards are reluctant to argue the toss. Whether that will be the case remains to be seen.

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