Financial Reporting Council (Miscellaneous Provisions) Order 2021

Baroness Wheatcroft Excerpts

Thursday 18th March 2021 Grand Committee

[Baroness Wheatcroft (CB) [V]]

My Lords, I thank the Minister for the way in which he introduced this statutory instrument, and I am delighted to follow the noble Lord, Lord Davies. His final point was very interesting, and I would be interested to hear how the Minister will address the issue of how one monitors the regulators. As the noble Lord said, there are so many of them. What they do is important, and they need to be held to account.

On one level this is a perfectly straightforward SI, imposing three new and perfectly reasonable duties on the FRC. But the anomaly is the FRC itself. In December 2018, in his review of the organisation, Sir John Kingman described it as the equivalent of

“a rather ramshackle house, cobbled together with all sorts of extensions over time.”

In other words, it was not fit for purpose—a verdict that the Government themselves accepted the following March, in welcoming the review.

They were equally supportive of the findings of the Competition and Markets Authority, which called for significant changes to the way in which the audit profession operates in the UK. Indeed, the Queen’s Speech in December 2019 stated as one of its priorities the reform of auditing.

What we have here is just another extension to that rather ramshackle house, which is becoming increasingly unstable. I know that the Minister acknowledged the need for root and branch reform, and for the new regulatory authority that will eventually come to us, but here we are, in March 2021, debating a minor SI relating to the still-extant FRC.

The letter that we received this afternoon—what a wonderful coincidence of timing—tells us that the White Paper is coming out and that there will be reform. It all sounds very promising, but my first question to the Minister has to be: when does he think, realistically, that we might see legislation on this, and the emergence of the new accounting regulation and governance authority?

In the meantime, we remain dependent on the FRC to conduct this crucial work and its governance is in flux. In October 2019, Simon Dingemans took over as interim chairman. This turned out to be even more of a temporary post than most had expected; in May the following year, he was lured away by private equity. He was replaced, although not until the following October, by Keith Skeoch but this was declared to be for a term of no more than six months. My second question to the Minister is: does he have a successor lined up for 12 April? It seems that the FRC will be with us for a while to come and, at the moment, I am unaware of who is going to be leading it.

It is important that the equality duty in this SI should certainly be imposed, as the Kingman review found that very few roles at the FRC actually went through an appropriate recruitment process. That might have done more to improve the gender pay gap there, which is still quite pronounced. Reform of the organisation is clearly needed urgently, as is reform of the audit profession. It continues to disappoint. In 2018, the fines levied by the FRC against the big four accountancy firms trebled. Last year, a record fine of £15 million was levied against Deloitte. But it does no good for the credibility of the audit profession if all of the big four firms are regularly seen to be guilty of misleading accounts, and misleading the investing public—and the public more generally.

The proposal we have seen in the White Paper is that there should be compulsory joint audits. But the original suggestion was that the smaller audit firm taking part in these joint audits should be jointly liable, with the larger firm, for anything that went wrong and resulted in action and fines. As far as I can see, that is absolutely unworkable. As my third and final question, can the Minister say whether he believes that there will be equal liability on these smaller firms—the challenger firms—that will be brought into joint audits, or that a more reasonable system of liability will be brought into play?