188. The timid and reactive engagement by the Financial Reporting Council with Carillion underlines the conclusion of the previous BEIS Committee that enforcement of corporate governance responsibilities is not strong enough. The Committee's report recommended a more interventionist approach from an expanded and better-resourced FRC, including spot checks on companies to act as a deterrent against poor practice, and increased powers to allow it to initiate legal action against any director. The Government did not accept these ambitious recommendations. The Secretary of State for Business, Energy and Industrial Strategy, the Rt Hon Greg Clark MP, has consistently argued that the increased powers sought by the FRC are unnecessary. He told us that the powers that they need are there if they act jointly with the Insolvency Service and the Financial Conduct Authority.514 To this end, these regulators have now signed a Memorandum of Understanding (MoU) to facilitate better use of their different powers when investigating the same company. Stephen Haddrill was not convinced that this was sufficient, telling us "as we saw before the financial crisis, regulators can collaborate and then they stop collaborating. I would like to see some structure around that".515
189. The present regulatory set up is convoluted and inconsistent. The FRC can pursue some directors, not others; monitor some reports but not others. There are too many regulators in the corporate kitchen, each with overlapping responsibilities but slightly different aims and agendas. Any government will know that it is hard enough to secure internal agreement, so to expect three or four regulators to cooperate seamlessly and harmoniously in pursuit of a common goal seems unrealistic and likely to slow down further already sluggish progress on investigations. Similar problems have been evident in pensions regulation. In its investigation into the British Steel Pension scheme, the Work and Pensions Committee found that steelworkers were gravely let down by two slow-moving and timid regulators-TPR and the FCA-who failed to co-ordinate to protect their pensions.516
190. The Government announced a review of the FRC on 17 March 2018, to be led by Sir John Kingman. The Government's stated objective of the review is to ensure that the FRC will remain "best in class" and the scope is wide: it aims to "ensure that its structures, culture and processes; oversight, accountability, and powers; and its impact, resources, and capacity are fit for the future."517 It is not clear from the terms of reference or the evidence from the Secretary of State whether this review is an effort to revamp a body judged reluctant to throw its weight around, or a vehicle to re-examine the case for tougher regulation of company directors and further powers for the regulators.518
191. At present, the role of the FRC is confused. It is the professional regulator for accountants but also responsible for the voluntary codes that guide the behaviour of directors and investors. It has an apparently little-known role in investigating complaints raised relating to its remit by whistle-blowers.519 The quality of audits, as we have seen, is not of a consistently high standard. The FRC reports that 81% of FTSE 350 audits in 2016 required only limited improvement, meaning that 19% were significantly below standard: not a ringing endorsement of a high quality and competitive audit market.520 Where standards fall below what is expected, the FRC is far too passive in demanding improvements and monitoring subsequent performance. It therefore offers no effective deterrent to sloppy auditing and accounting, and does nothing to dispel views that it is too sympathetic or close to the accountants and auditors it regulates.
192. The FRC does not appear to acknowledge a link, in terms of its responsibility, between adequate financial reporting, good corporate behaviour and the survival of companies. Stephen Haddrill told us that the FRC cannot see inside a company and does not oversee a system designed to stop companies collapsing. He argued against having powers to intervene in every company-there was a need for enterprise and must be room for failure-but advocated stronger powers to "be more transparent about the sorts of things we are finding."521 This lack of transparency contributes to its inability to act as a credible threat to poor reporting practices. Companies can expect nothing more than a quiet word and encouragement to do better next time. There are signs that the FRC is beginning to adopt a more proactive approach.522 In April 2018 it invited representatives from the investment community to form an Investors Advisory Group, to improve engagement between the FRC and the broad investor community. That month it also announced plans to enhance the monitoring of the six largest audit firms to, amongst other matters, "avoid systemic deficiencies within firms' networks".523
193. This case is a test of the regulatory system. The Carillion collapse has exposed the toothlessness of the Financial Reporting Council and its reluctance to use aggressively the powers that it does have. There are four different regulators engaged, potentially pursuing action against different directors for related failings in discharging their duties. We have no confidence in the ability of these regulators, even with a new Memorandum of Understanding, to work together in a joined-up, rapid and coherent manner, to apportion blame and impose sanctions in high profile cases.
194. At present, the mindset of the FRC is to be content with apportioning blame once disaster has struck rather than to proactively challenge companies and flag issues of concern to avert avoidable business failures in the first place. We welcome the Government's review of the FRC's powers and effectiveness. We believe that the Government should provide the FRC with the necessary powers to be a much more aggressive and proactive regulator: one that can publicly question companies about dubious reporting, investigate allegations of poor practice from whistle-blowers and others, and can, through the judicious exercise of new powers, provide a sufficient deterrent against poor boardroom behaviour to drive up confidence in UK business standards over the long term. Such an approach will require a significant shift in culture at the FRC itself.
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514 Q1251 [Greg Clark]
515 Q21 [Stephen Haddrill]
516 Work and Pensions Committee, British Steel Pension Scheme, Sixth Report of Session 2017-19, HC 828, February 2018
517 'Government launches review of audit regulator' Department for Business, Energy and Industrial Strategy Press Notice, 17 April 2018
518 Oral evidence taken before the Liaison Committee on 7 February 2018, HC 770 (2017-19), Q70 [David Lidington]
519 According to the FRC's Annual Report for 2016-17, it received 12 such complaints that year and investigated further only two.
520 Financial Reporting Council, Developments in audit 2016-17, July 2017, p 5
521 Q78 [Stephen Haddrill]
522 Also, an independent review of the FRC's enforcement procedures sanctions in October 2017 made some technical recommendations but made no case for major change.
523 Financial Reporting Council, FRC to enhance monitoring of audit firms, 10 April 2018