The UK’s audit regulator has come under strong criticism from political parties in a debate about emergency legislation to create an endorsement mechanism for International Financial Reporting Standards (IFRS).

In the debate in the UK parliament’s upper chamber, the House of Lords, peers discussed a framework to apply if the UK falls out of the EU without signing off the withdrawal agreement drafted in November. The framework would be temporary until the government can introduce primary legislation to set up a successor organisation to the Financial Reporting Council (FRC).

Long-standing FRC and IFRS critic Baroness Sharon Bowles argued that the FRC had “converted” UK generally agreed accounting principles “into IFRS-like rules” to the detriment of long-term investors.

Bowles, a former chair of the European Parliament’s Economic Affairs Committee, said the FRC’s actions had potentially breached the capital maintenance requirements of the UK Companies Act 2006.

Referencing a March 2013 FRC impact assessment of the policy, she said it read like “a business plan for the big four [audit firms]”.

She said a recent fitness check on the FRC by former senior servant Sir John Kingman had revealed that the organisation was “a captured regulator that was designed to take account of the companies and professions that it regulated”.

Conservative party peer Lord Hodgson said: “If there is to be a clash between international standards and UK law, UK law must prevail because it is the law of this country.” 

Hodgson highlighted a briefing note from the Association of British Insurers (ABI), the insurance industry lobby group, that disagreed with the premise that the secretary of state should delegate all his functions to an endorsement board for the accounting standards. 

The ABI argued it would be “counterproductive” and “inconsistent with the aims of the Withdrawal Act”, under which the UK will exit the European Union.

The note continued: “We strongly urge that, in the House of Lords debate… assurances are sought from the responsible minister that the new [legislation] will provide for active political oversight of the endorsement board by the secretary of state”.

Central to the ABI’s concerns was the fear that ‘offshoring’ responsibility for IFRS endorsement would mean that the UK lost the ability to represent its political and commercial interests as new accounting standards were developed.

The government has signalled it would introduce a further statutory instrument – at an as-yet unspecified point in time – to deal with IFRS endorsement and other matters in the longer term.

Audit sector under scrutiny

The House of Lords debate comes as the audit profession, accounting and the FRC together face unprecedented political and regulatory scrutiny.

Alongside the Kingman review of the FRC, the audit sector is currently the subject of an inquiry by the Competition and Markets Authority.

In addition, an inquiry led by Sir Donald Brydon is examining the quality and effectiveness of the UK audit market.

The Brydon review is running in parallel to actions in the UK parliament, most notably by members of the Business, Energy and Industrial Strategy (BEIS) Select Committee, which has turned its fire on numerous high-profile corporate collapses such as construction firm Carillion and bakery chain Patisserie Valerie.

Earlier this month, business secretary Greg Clark announced the government intended to abolish the FRC and introduce a new, independent regulator with tougher powers.

Labour peer Lord Stevenson has questioned the wisdom of the decision to “host” the new audit regulator within the FRC.

In a response for the government, Lord Henley said the FRC “would host it purely in terms of human resources and other such matters” and would remain under the political control of the government.

However, a group of pension funds has called for a thorough clear-out of staff to ensure a clean slate for the new regulatory body.

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