The former senior civil servant responsible for reviewing the performance of the UK’s Financial Reporting Council (FRC) has told lawmakers that the body should be wound up and replaced with new regulator led by a “credible” leadership team. 

Sir John Kingman said in front of a parliamentary inquiry last week: “We need this regulator to have a chief executive and a board who are capable of establishing that credibility.

“It will take time… because building credibility does take time, but we have seen other regulators in this country come on that journey, so I see no reason why this one cannot.”

Sir John added that the political appetite to deal with the issues highlighted in his report at the FRC was strong.

He said: “I have had very positive engagement with the Secretary of State in particular. He took a very close interest in the review as it progressed… The sense I have from him is that he wants to make really serious progress in this area; he wants to see a new and more effective regulator.”

Quizzed about the future regulation of the audit profession following the Carillion collapse, Sir John said any new regulator must have the power to “go in and have a look” where there were concerns about the financial health of a company.

He said: “If it discovers things that are concerning about the running of the company, first of all it should recommend changes to the company, but it should have the power to issue a public report to say, ‘this is what we have found’ – and in the worst case to make a recommendation to shareholders that they do something.”

The call for a more proactive regulator effectively signals the end of the era of self-regulation by the audit and accounting profession in the UK.

Sir John’s comments follow the publication in December of his strongly worded assessment of the FRC’s performance over the past three decades.

The FRC’s chair, Sir Win Bischoff, said in a statement that it welcomed the report and its recommendations, which he said “have the potential to bring about significant improvements to the work we do in protecting the interests of investors and the wider public”.

In a series of recommendations, Sir John criticised the audit and corporate governance watchdog for failing in its oversight of the audit profession and its corporate culture.

He went on to accuse the FRC of lacking accountability to the public through its failure to implement fully UK freedom of information legislation as well as UK government public procurement rules in certain areas.

FRC’s update on Carillion investigation

Separately, the FRC has released an update on its investigation into the audit issues surrounding the collapse of the outsourcing company a year ago.

The watchdog is looking into KPMG’s audits of Carillion between 2014 and 2017, as well as probing the conduct of its two of its former finance directors.

In a parallel development, the FRC said in November that it was to assess “the provision of materials to the FRC by KPMG in connection with the FRC’s audit quality review into aspects of the audit of Carillion for the year end 2016”.

The existence of this second line of inquiry was only made public last week.

The investigation is looking into the financial performance of Carillion’s major contracts in both its construction and services divisions, and whether its management and auditors took sufficient steps to ensure that the firm’s financial statements were reliable in those areas.

The investigations are also looking into Carillion’s accounting for pension liabilities, goodwill, cash disclosures, as well as its going-concern assessment.

Last year, IPE highlighted how the FRC had singled out Carillion’s dividend disclosure as one of several leading examples of good practice in an FRC-backed Financial Reporting Lab study.

Artificial intelligence in accounting

Finally, the FRC’s Financial Reporting Lab has released a report into how artificial intelligence (AI) could be deployed in financial reporting.

The report examined three possible scenarios for AI: recording and aggregating transactions; internal and external assurance; and the analysis of data by end users.

It concluded that “it is not a question of whether AI will become important for corporate reporting, but when”.

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