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UK Government Urged To Break Up Financial Reporting Council

The U.K. government heard calls this week to break up its Financial Reporting Council (FRC), separating the body’s audit watchdog and corporate governance roles into two regulators, reports in City A.M. said Tuesday (Aug. 7).

The Institute of Directors (IoD) initiated the call for the FRC breakup, and former Treasurer John Kingman leads the government’s review into the FRC’s effectiveness. Criticism has mounted against the FRC in the wake of the collapse of government contracting giant Carillion — policymakers question how the government was unable to prevent its auditor, KPMG, from identifying Carillion’s accounting failures.

MPs accused KPMG of “failing to exercise professional skepticism,” and the ordeal has amplified calls to break up the nation’s Big Four auditors, which, along with KPMG, include PwC, EY and Deloitte.

The IoD says the same should be done to the FRC. In a letter sent to the government, the IoD said the FRC’s structure is “not conducive to the differing regulatory approaches needed for governance and stewardship on the one hand, and statutory audit on the other.” The letter also warned against combining the FRC’s corporate governance operations into another government body, like the Financial Conduct Authority.

“If the [corporate governance] codes were placed under the ambit of a conventional regulator, businesses would fear that this heralded a more legalistic approach, which would undermine our much admired ‘comply or explain’ governance framework,” the IoD said.

The letter pointed to Germany as an example of a government that was able to successfully establish an independent corporate governance commission, separating accounting regulation.

“This would help the process of making changes to the U.K. corporate governance code become more transparent, with clearer lines of accountability, rather than being subsumed by a large regulator where corporate governance is just one concern amongst many,” said the IoD.

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