Financial Reporting Council (Miscellaneous Provisions) Order 2021

Lord Sikka Excerpts

Thursday 18th March 2021 Grand Committee

[Lord Sikka (Lab) [V]]

My Lords, I will make my comments in two parts. I will comment first on the legislative order and, secondly, taking my suit from the Minister, say a few words about the White Paper as well. On the legislative order, the Financial Reporting Council has really led a shadowy existence for far too long. Since 2004, the FRC has had the status of a public body and should therefore have been subjected to the full application of the freedom of information legislation, but it was not.

On 29 June 2018, the Department for Business, Energy and Industrial Strategy told the House of Commons, in a Written Answer:

“All our regulatory bodies are subject to the Freedom of Information Act 2000 with the exception of the Financial Reporting Council which is subject to the Act for some but not all of its functions.”


Over the years, I have put in many freedom of information requests to the FRC, some relating to the secondment of staff from the big four accounting firms, its complaints procedures and the quality of investigations. Every one of them was rejected so it is good, to some extent, to see a modicum of openness. I assure the Minister that I shall soon test this new-found openness and see how far it goes. Nevertheless, I have a number of concerns about the legislative order and, more importantly, its omissions.

First, despite the government claim, which I just cited, that all our regulatory bodies are subject to the Freedom of Information Act 2000, why are the four accountancy trade associations acting as recognised supervisory bodies not within the scope of freedom of information legislation? The four trade associations are the Association of Chartered Certified Accountants, the Chartered Accountants Ireland, the Institute of Chartered Accountants in England and Wales and the Institute of Chartered Accountants of Scotland. They carry out public functions and are named as regulators in the Companies Act 2006. They licence, monitor and discipline auditors. Their role is similar that of the FRC. So why are they totally exempt from freedom of information requirements?

Secondly, Article 4(1)(c) of the order refers to “accounting standards” but no mention is made of “auditing standards”, which are also issued by the FRC. I hope the Minister can shed some light on that omission.

Thirdly, Article 4(1)(m) of the order refers to:

“providing independent oversight of the regulation of the accountancy profession”.

No further details are anywhere to be seen. Is it reasonable to assume that in the Government’s view the FRC is now responsible for ensuring good governance of all accountancy trade associations?

Fourthly, despite claims of openness, or advances in openness, the FRC, which, as was mentioned, will soon morph into ARGA, has in fact regressed in some areas. Let me provide two examples. The first is its press release dated 2 April 2020 with the headline

“Sanctions against KPMG and a partner”


and the second is dated 6 November 2020 and headed

“Sanctions against Deloitte and a partner”.


In both cases, the firm delivering the failed audit has been named, but unlike the past practice, the identity of the company receiving the poor audit has been concealed. Why is that? Do the stakeholders of those companies not deserve to know that dud audits have been delivered? Armed with that information they can question auditors and directors, and make informed decisions about auditor appointment, fees, investment, credit, reliance on the audited information and much more. The FRC’s regression is not compatible with the Government’s claim of new openness at the FRC.

Fifthly, the so-called openness at the FRC is not accompanied by open board meetings. I am sure the Minister would acknowledge that the FRC does not discuss troop movements or the position of spy satellites, so this obsession with secrecy and keeping the people out is hard to understand. In the US, the Financial Accounting Standards Board holds all its meetings in the open and makes full minutes and background papers available to any interested party. The same is also true of the Swedish Accounting Standards Board. As we know, openness always promotes public confidence and accountability, so why are the Government afraid of writing in open board meetings in the current legislative draft or in some other ways? Why is the UK to be a laggard in such matters?

Sixthly, the FRC publishes its board minutes, but they are sanitised and have virtually no information content—I have seen them. Paradoxically, individuals sitting on its board and various committees come from corporations and big law and accounting firms and have full access to all inside information. It must inevitably inform their worldviews and policy options discussed within their organisations. Yet the other stakeholders affected by the FRC’s decisions and policy choices do not have access to the same information and must therefore be disadvantaged in any negotiations, lobbying and framing of accounting and auditing rules. Why are the Government content with this kind of information apartheid? It is almost legalised.

Seventh, the legislative order before us is full of words such as “independent” and I struggle to know what the Government mean. The FRC is not independent of corporations and big accounting firms as their personnel have colonised the FRC board, committees, working parties and its world views. Corporate thinking informs the FRC’s operation and, inevitably, there is cognitive capture. Neither is the FRC independent of the International Accounting Standards Board, which issues international accounting standards that in many cases are simply rubber stamped by the FRC. I am sure the Minster is aware that the IASB is an offshoot of the IFRS Foundation, which is registered in the US state of Delaware for the sole reason of avoiding taxes on all the income and charitable donations it receives. Is that a good way to be setting accounting standards, with somebody holed up in Delaware and keen to avoid taxes? That is not really appropriate.

It would be helpful to know what exactly the FRC is independent of. What are the tests the Government will specify we should apply to test whether the FRC passes those marks? It would also be helpful for the Minister to tell us whether any part of the FRC’s operations are not subject to the Freedom of Information Act and why they are excluded.

I will say a few words about the White Paper. For the last 20 years, the auditing industry has led a charmed life. Most of the urgently needed reforms have been postponed. The White Paper does not really tackle any of the fundamental issues. I am sure the Minister is aware that the FRC has said that up to 80% of the audits in its samples are deficient. Can you imagine if any producer of cars, aeroplanes, medicines or food had an output that was 80% deficient? That industry would be put out of business and taken into special care, not allowed to play its selfish games.

In my view, the White Paper misses the fundamental points and it does not address those things. In the White Paper there is a memorable line about share- holders being company owners. Can the Minister refer me to any economic theory, legal theory, or anything in the Companies Act which says that shareholders are owners of companies? Shareholders may have controlling rights, but they have absolutely no ownership; that is something entirely different. For the last 100 years we have been relying on shareholders. Where exactly has that got us?

I was an adviser to the Work and Pensions Committee for the investigation of BHS. Shareholders appointed the auditors and everybody else, and we all know what the outcome was. In many ways the Government are reciting the past failures and repeating the past mistakes—

[Baroness Sanderson of Welton (Con)]

Can I remind the noble Lord of the 10-minute speaking limit?

[Lord Sikka (Lab) [V]]

I will stop there. Thank you.