Economia magazine, published for the Institute of Chartered Accountants in England and Wales, had a feature yesterday, highlighting the concerns of PIRC, the pensions and investment advisory consultancy on the work of the Financial Reporting Council. This related to a submission made by PIRC to the BEIS Committee in parliament. In tat submissionm a Economia noted:
PIRC accused the Financial Reporting Council (FRC) of persistently getting the law wrong and then trying to cover its tracks by setting up “signposts” that point in the opposite direction to the legislation.
It has also claimed that the regulator has not been operating totally independently from the accountancy profession that it oversees, since it has employed the same legal counsel who advises ICAEW, and used an FRC board member to do FRC legal work who not only has been “on one or other FRC board for more than 30 years”, but whose career included acting in defence of a number of accountancy firms.
The allegation is serious, reasoned and I think appropriate. I should add when saying so that I have and do work for PIRC on occasion, but not on this issue, with which I have no involvement. The complaint, as Economia again notes:
opens up another front in the campaign that [PIRC] has been building over the last couple of years against the FRC’s approach to aspects of financial reporting and corporate governance. In particular, questions have been raised by the Local Authority Pension Fund Forum (LAPFF) over the legality of the FRC’s approach to the true and fair override and distributable profits.
The allegation is simple and direct: as legal opinion obtained by PIRC has shown it seems very likely that the FRC and ICAEW do not understand the nature of UK company law on that issue and now they seem determined to repeat their failing. This is Economia again:
PIRC’s most recent concerns over the FRC’s sign-posting arise from evidence given by FRC chief executive Stephen Haddrill to the BEIS Committee last month on corporate governance in the aftermath of the BHS and Sports Direct scandals. This evidence was, PIRC asserts, “materially wrong”.
Haddrill told the committee that he was looking for powers and a mechanism to require companies to report on s 172 (the wider stakeholder responsibilities). Companies did not currently report on how they had gone about fulfilling their duties in relation to the wider stakeholder community, he said. What was needed was to invigorate the Companies Act provisions “that ask directors or place a duty on directors to pay attention to stakeholders, other than the shareholder”. [And] he explained that the FRC wanted some way of being able to scrutinise what companies report in this area and to call them to account if it did not think they had “really justified their position”.
There is just one minor problem with this claim:
Yet, as PIRC points out, there already is a mechanism in the law - the requirement for a strategic report which is contained in s 414C of the 2006 Companies Act.
The section states that the purpose of such a report is to help members of the company assess how the directors have performed their duty under s 172. S 172 in turn imposes a requirement on the directors to take wider stakeholders’ interests into account.
In response, Economia reports that:
An FRC spokesperson said, "We will be responding to PIRC to correct points made in their supplementary evidence and which suggests a misunderstanding of parts of company law."
Three thoughts follow. First, it's time for the FRC to engage on company law and why it might have ti wrong, rather than keep on spinning on why others are wrong.
Second, it might also be time for the FRC to do the job it has rather than invent new ones: I strongly suspect that inventing new ones puts very long delays into apparently doing anything.
Third, if it really thinks it has a duty to stakeholders it might like to suggest why it will not engage publicly on country-by-country reporting as I have asked them to do.
Fourth, it might like to improve its own governance, as PIRC notes.
Last, I applaud PIRC for doing this. There is a chance that the FRC may become responsible for all UK accounting setting after Brexit and IFRS need no longer apply. That would be very worrying on the basis of the present evidence.