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Accounting: Pick up the tab

Peter Williams

This month, the Financial Reporting Council is consulting stakeholders on how
it should be funded. The consultation is a regular task, except this year it has
an extra frisson because the government has all but pulled the rug on
its contribution to the body responsible for corporate governance in the UK. At
the moment, the government pays for around 20% of the costs of the FRC, which
equates to one-third of its core expenditure.

The government’s intention to walk away from the long-standing tripartite
agreement between itself, the accountancy profession and listed companies was
announced by Trade and Consumer Affairs Minister Gareth Thomas MP. In a move
that took everyone by surprise, Thomas said the government would only guarantee
funding through to the end of 2008-09. A move to largely private sector funding,
Thomas told the House of Commons, would be consistent with the way the FRC’s
actuarial work is funded and with the funding of other similar regulatory
bodies, such as the Financial Services Authority and the Pensions Regulator.

The government also claims that its funding does not sit well with the FRC’s
new board, which is now composed largely of private sector, rather than
ministerial, appointees. The government has, therefore, concluded that, as a
market-led regulator, the FRC should in future be funded largely by market
participants.

Privately, the FRC is trying to be sanguine about the threatened defection.
It agrees it is an anomaly. As one commentator put it: “The government is trying
to push the principle of ‘the polluter pays’.”

But while the government may see the logic of saving a few quid, the
accountancy profession is not going to let it slip away from the tripartite
agreement without creating a fuss. While the FRC reacted with restraint to the
news, the accountancy profession could barely conceal its fury. It referred to
the independent 2003 Swift review, which reaffirmed its belief in the system
saying that the annual running costs of the independent regulator should be
broadly shared by government, business and the professional bodies.

Whether the government is open to persuasion is doubtful. But if it expects
business and the accountancy profession to pick up the shortfall, it may be
disappointed. The Consultative Committee of Accountancy Bodies (CCAB) reiterated
its commitment to supporting the work of the FRC and paying its “appropriate
share of the cost”. You don’t need to read too deeply between the lines to guess
the accountancy profession doesn’t want to up its overall contribution to the
work of the FRC.

This is a government known for paying lip service to a partnership with
business, but, in reality, unprepared to listen when it has made up its mind;
recent experience over tax policy illustrates that point. But there are good
arguments why it should maintain its financial contribution and, therefore, its
influence over corporate governance, financial reporting and accounting
standards.

One of the weakest elements of the financial reporting chain is the lack of
influence that users have in this process. The government is a heavy user in its
own right of the outputs of financial reporting, but it also acts as a surrogate
for small shareholders and the millions who invest indirectly through pension
funds. Who else but the government can be a representative for British
taxpayers, who rely on the integrity of the financial reporting system for key
issues such as the security of their savings and their pension? What signal does
this send at a time when post-credit crunch questions over the integrity of
financial reporting, impairment and write-offs remain unanswered and there is a
general air of nervousness and gloom? The FRC and its subsidiaries have worked
well. It is a uniquely British structure and one the government is needlessly
putting at peril. Government representation has always been a centre-piece of
the delicate balance. It has encouraged the FRC to grow and take on further
responsibilities – acting as an umbrella body for accounting, auditing and
actuarial standards, while also looking after corporate governance. At £3m a
year from the government, we’re only talking small change for the taxpayer and
for British business. But it is the principle as much as the cash.

Michael Izza, CCAB secretary and chief exec of the ICAEW, has called for a
comprehensive consultation on FRC funding. The money may be found by some
combination of the accountancy profession, the City and the quoted sector. Or
the FRC could always cut its coat according to its cloth. It seems likely that
the government has been swayed by the rise of the international accounting
standard as a reason why it can withdraw support from the home-grown standard
setter. The power of the International Accounting Standard Board will become
even more pronounced when it produces its own standard for small and
medium-sized enterprises, thereby ensuring another large swathe of UK corporates
no longer use the work of the UK Accounting Standard Board. The end result of
all this could be quite straightforward: maybe it’s bye, bye, ASB.

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