Institute of Directors: ‘Spin off FRC’s governance arm to strengthen audit oversight’

An independent Corporate Governance Commission should be established to oversee the UK’s corporate governance framework, enabling the Financial Reporting Council (FRC) to better focus on its core task of improving company audits, the Institute of Directors has argued.

Recent corporate failures have highlighted the need for a fundamental review of the purpose of the statutory audit and how it is overseen by the regulator. However, business leaders fear that having corporate governance and investor stewardship regulated within the same body as statutory audit is a far from ideal approach, given the differing regulatory approaches that are needed in each area. The UK Corporate Governance Code and the UK Stewardship Codes are both ‘soft law’ codes which aim to influence corporate behaviour through best practices rather than mandatory regulation. This contrasts with the oversight of statutory audit where a more robust regulatory approach is needed.

In its submission to the Department for Business, Energy and Industrial Strategy consultation on the Independent Review of the FRC, the business group proposed that the UK’s governance and stewardship codes be administered by an independent body with close links to business and investors, rather than simply being an ‘add on’ to an accounting regulator. The IoD argues that the shaping of voluntary best practice for boards of directors, and the setting and enforcement of accounting standards are very different activities and should, therefore, be overseen by separate bodies.

The IoD said the new commission would work with industry to create greater accountability and transparency of the UK’s corporate governance framework. This would help the process of making changes to the UK 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.

As well as a new commission, the IoD recently proposed an industry-led professional standards board tasked with upholding high standards of director competence and continuing professional development. This, it argued, would be a more effective and proportionate way of enhancing director accountability, as opposed to giving the FRC power to take action against non-accountant directors.

The full submission can be viewed here.

Dr Roger Barker, Head of Corporate Governance at the Institute of Directors, said:

“Corporate governance has been swallowed up within a regulator that now urgently needs to focus its energies on improving the legitimacy of statutory audit. The FRC has for many years done a good job acting as the keeper of the UK’s corporate governance code, but we feel its centralised decision-making structure is not conducive to the differing regulatory approaches needed for governance and stewardship on the one hand, and statutory audit on the other. There must be a clear distinction between being robust on audit quality, while continuing to nurture the UK’s much admired principles-based corporate governance regime.

“With recent high-profile corporate failures we see there are legitimate concerns about the role of the accounting regulator. There are strong arguments for bolstering its investigative and enforcement powers over statutory audit. However, corporate governance and investor stewardship are qualitatively different areas of regulatory activity. They benefit from a much more flexible and collaborative approach.

“It is unfortunate that the current remit of the regulator creates an unhelpful perception that corporate governance is simply there to supplement the accountancy profession, when if anything the reverse is true.”