The UK accounting regulator’s new chair has warned that the government’s decision to drop extra oversight rules for company boards to tackle audit failure was a “missed opportunity”.
Sir Jan du Plessis, in his first public speech since becoming chair of the Financial Reporting Council in February, pledged to hold company directors to account with his own version of the Sarbanes Oxley-style proposals that were dropped by British ministers.
Du Plessis described the government’s decision to ditch the proposal in its audit white paper as “a political decision and a policy decision”, but one that the FRC would seek to redress with a review of the existing corporate governance code.
The FRC chair said the code could be used “to ensure that directors accept more overt responsibility for their internal controls”.
The US Sarbanes Oxley Act was launched in the wake of the collapse of Enron, and has brought in extra reporting obligations on company boards and managements. The rules require boards to assess and report annually on the effectiveness of their company’s internal control structure and procedures for financial reporting.
The audit watchdog will consult on its plans for the code later this year, Du Plessis said, adding that the audit profession was in part to blame for a succession of scandals, such as Carillion and Patisserie Valerie, but that company directors also needed to take responsibility.
“If we look at the scandals we had a number of years ago . . . quite rightly [politicians] said that the audit profession does not deliver what it should. But you cannot just look at the audit profession if you want high quality reliable audit reporting,” he said.
The FT revealed last year that the government had ditched plans to use legislation to require directors to sign off on companies’ internal controls over financial reporting, modelled on the Sarbanes-Oxley Act, as it sought a more “business friendly” regime.
Du Plessis underlined that boards still needed to take responsibility for their accounts. “We will be consulting about the merit of using the corporate governance code and the audit reforms we are working on to put more pressure on boards of directors to take responsibility for their own internal controls. It won’t be Sarbanes Oxley, but it is the same idea.”
The former chair of BT and miner Rio Tinto was nominated in December by the government to lead the FRC, which is being revamped after widespread criticism of its oversight of a string of corporate governance scandals and its inability to tackle the dominance of the Big Four audit groups.
Under the audit reforms being planned by ministers, the FRC is set to be replaced by a regulator with greater powers called the Audit, Reporting and Governance Authority.
Du Plessis used his speech at City and Financial Global’s Regulation of Listed Companies Summit to stress the importance of trust in the corporate sector.
He said the “interests of business and wider society are today much more intertwined and interdependent than ever before”, which meant that “when the actions of some begin to undermine the trust that is so important to the health of that relationship, it undermines the ability of businesses to be successful and to meet the needs of wider society”.
But he admitted the FRC also accepted that corporate failures were “an integral part of a healthy competitive market, and we don’t for a moment believe that our reforms will prevent those”.