Financial Reporting Council

What is the Financial Reporting Council?

The Financial Reporting Council (FRC) is the UK’s independent regulator of corporate governance, financial reporting, audit and the actuarial profession. In 2019, amid criticisms over the body’s performance, the government decided to replace the FRC with a new Audit, Reporting and Governance Authority (ARGA). But the necessary legislation has not yet been passed and the FRC continues to operate, having undergone a process of reform.

What does the FRC do?

The FRC was originally established in 1990 with the principal aim of promoting best practice in financial reporting. ⁵⁵ Financial Reporting Council, ‘Report and Financial Statements 1991’, Financial Reporting Council, 31 March 1991, retrieved 30 May 2023, https://www.frc.org.uk/getattachment/c065d3e2-7204-409e-8863-92831752ed4a/ReportandFinancialStatements1991.pdf, p. 2.
  Over time, its remit has expanded, and its stated purpose is now to serve the public interest by setting high standards of corporate governance, reporting, auditing and actuarial work, and by holding to account those responsible for delivering them. ⁵⁶ The Financial Reporting Council, ‘Annual Report and Financial Statements for the Year Ended 31 March 2022’, Financial Reporting Council, 19 July 2022, retrieved 30 March 2023, https://www.frc.org.uk/getattachment/8caee6b0-0fe0-4489-9edc-96e24a27d277/FRC-Annual-Report-and-Accounts-2021-22.pdf, p. 7.
  In practice, its main work is in overseeing the audit, accounting and actuarial professions, and corporate governance.

The FRC sets the eligibility criteria, and technical and ethical standards, for those approved to carry out the statutory audit of an organisation’s annual accounts in the UK. ⁵⁷ Financial Reporting Council, ‘Auditors’, Financial Reporting Council (no date) retrieved 31 May 2023, www.frc.org.uk/auditors
  It also maintains, or requires others to maintain, various registers including of those approved to audit public interest or local bodies. ⁵⁸ Financial Reporting Council, ‘Roles and Responsibilities’, Financial Reporting Council, December 2022, retrieved 1 June 2023, www.frc.org.uk/getattachment/9c78e7fd-b9ff-4aa2-a563-2141fabfaa20/FRC-Roles-and-Responsibilities-Schedule-of-Powers-December-2022.pdf, pp. 4-6.
 

It also issues accounting standards and clarifies conflicting interpretations of those standards. It oversees self-regulation conducted by various professional accounting bodies and monitors compliance with accounting and legal requirements, for example when companies issue directors’ reports. ⁵⁹ [1] Financial Reporting Council, ‘Roles and Responsibilities’, Financial Reporting Council, December 2022, retrieved 31 May 2023, www.frc.org.uk/getattachment/9c78e7fd-b9ff-4aa2-a563-2141fabfaa20/FRC-Roles-and-Responsibilities-Schedule-of-Powers-December-2022.pdf, p. 8.
  Its accounting standards are also applicable in Ireland. ⁶⁰ Financial Reporting Council, ‘UK Accounting Standards’, Financial Reporting Council (no date) retrieved 1 June 2023, www.frc.org.uk/accountants/accounting-and-reporting-policy/uk-accounting-standards
 

The FRC’s role is similar for the actuarial profession – setting standards, overseeing professional bodies and providing an independent investigation and discipline scheme for matters potentially affecting the public interest. ⁶¹ Financial Reporting Council, ‘Roles and Responsibilities’, Financial Reporting Council, December 2022, retrieved 31 May 2023, www.frc.org.uk/getattachment/9c78e7fd-b9ff-4aa2-a563-2141fabfaa20/FRC-Roles-and-Responsibilities-Schedule-of-Powers-December-2022.pdf, p. 10.
 

Finally, it oversees corporate governance by setting and monitoring the UK Corporate Governance Code (which applies to companies listed in the UK and Ireland) and the Stewardship Code (which applies to institutional investors in the UK). ⁶² Financial Reporting Council, ‘Roles and Responsibilities’, Financial Reporting Council, December 2022, retrieved 31 May 2023, www.frc.org.uk/getattachment/9c78e7fd-b9ff-4aa2-a563-2141fabfaa20/FRC-Roles-and-Responsibilities-Schedule-of-Powers-December-2022.pdf, p. 11.
 

What enforcement powers does the FRC have?

The FRC relies on a combination of statutory powers and non-statutory agreements with various other organisations – especially professional bodies – to achieves its aims. In some areas, particularly oversight of the actuarial profession and local authority audit, its concrete powers have been described as “limited or even non-existent”. ⁶³ Kingman J, ‘Independent Review of the Financial Reporting Council', HM Stationery Office, December 2018, retrieved 31 May 2023, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-independent-review-final-report.pdf, p. 7.
 

It has powers to investigate misconduct by statutory auditors or audit firms and can impose sanctions ranging from a public statement that a breach has been committed to financial penalties and prohibitions from working. ⁶⁴ Financial Reporting Council, ‘Enforcement', Financial Reporting Council (no date) retrieved 31 May 2023, www.frc.org.uk/auditors/enforcement It can also take action against members of the professional accounting bodies – individuals or firms – as well as individual actuaries who are members of the Institute and Faculty of Actuaries (IFoA). But the FRC currently has no powers to investigate, take enforcement action or impose sanctions on individuals, including directors, who are not members of these bodies, and its jurisdiction over actuaries relies on agreement with the IFoA. ⁶⁵ Financial Reporting Council, ‘Roles and Responsibilities’, Financial Reporting Council, December 2022, retrieved 31 May 2023, www.frc.org.uk/getattachment/9c78e7fd-b9ff-4aa2-a563-2141fabfaa20/FRC-Roles-and-Responsibilities-Schedule-of-Powers-December-2022.pdf, pp. 10-11.

How is the FRC structured?

The FRC is a company limited by guarantee ⁶⁶ Financial Reporting Council, ‘FRC Corporate Reporting Review Operating Procedures’, Financial Reporting Council, 6 May 2021, retrieved 31 May 2023, www.frc.org.uk/getattachment/05c38fe9-2cd8-49a1-a10c-c8c7d0536978/CRR-operating-procedures-FINAL-6-May-2021.pdf, p. 5. but also classified as an executive non-departmental public body of the business department ⁶⁷ UK Government, ‘Financial Reporting Council’ (no date) retrieved 31 May 2023, Gov.Uk, www.gov.uk/government/organisations/financial-reporting-council and since 2019 its board members have been appointed by the business secretary. ⁶⁸ House of Commons Business, Energy and Industrial Strategy Committee, The Future of Audit: Government Response to the Committee’s Nineteenth Report of Session 2017-19 (HC 2296), The Stationery Office, 5 June 2019, p. 10. It is funded through obligatory contributions from professional bodies and voluntary contributions from private companies, pension schemes and insurance companies. ⁶⁹ Financial Reporting Council, ‘Funding, Financial Reporting Council (no date) retrieved 31 May 2023, www.frc.org.uk/about-the-frc/funding

Why is the FRC being replaced?

Following high-profile auditing and accounting scandals including the collapse of Carillion, the FRC was heavily criticised by the business select committee, which said that its “weak response” contributed to a “crisis of trust in audit”. ⁷⁰ House of Commons Business, Energy and Industrial Strategy Committee, The Future of Audit: Nineteenth Report of Session 2017-19 (HC 1718), The Stationery Office, 26 March 2019, p. 3.  

An independent review by Sir John Kingman in 2018 found it to be “an institution constructed in a different era – a rather ramshackle house, cobbled together with all sorts of extensions over time” and highlighted its lack of a strong statutory foundation and limited powers. ⁷¹ Kingman J, ‘Independent Review of the Financial Reporting Council', HM Stationery Office, December 2018, retrieved 31 May 2023, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/767387/frc-independent-review-final-report.pdf, p. 5. The review recommended creation of a new regulator with a clearer sense of purpose and stronger powers.

This was adopted by government in March 2019, ⁷² BBC, ‘UK audit watchdog to be replaced by new governing body’, BBC, 11 March 2019, retrieved 31 May 2023, www.bbc.co.uk/news/business-47530302 but delays in passing the necessary primary legislation mean it is still not clear when the ARGA will be established. Meanwhile, the FRC has undergone an extensive programme of reform, which has included clarifying its purpose, changing its senior team, increasing its headcount and developing closer relationships with stakeholders who can help it to achieve its objectives.