Despite some negative coverage in recent months, the majority of the Financial Reporting Council’s (FRC’s) stakeholders still consider it to be independent of the auditing profession.
However, the UK audit watchdog could do more to help itself; particularly when it comes to convincing institutional investors who are the most concerned about its independence, by making its processes and outcomes more transparent.
Given the variety of areas that the FRC covers, nevertheless, a number of clear messages for the FRC come across, not least that as an organisation that holds others accountable, it also needs to be seen to be holding itself accountable to the same measures.
More than a quarter of institutional investors told researchers that they did not believe the FRC was independent of the audit profession. Reasons cited include the fact it hires many ex-auditors, it receives funding from audit firms, and a suspicion that it does not always hold auditors as accountable as they should be.
When you’re setting standards of governance for other companies and telling companies what they should be doing, then you have to be whiter than white.
Stakeholders want more transparency in the FRC’s disciplinary and enforcement activities.
One way round this issue would be for the FRC to step up its communication about its goals and activities, the researchers suggest. They point out that those stakeholders who are more engaged with the FRC have a greater understanding of its internal processes and constraints. Increasing outreach and communication with less-engaged stakeholders could help to improve favourability and perceptions of transparency.
In response, the FRC says that it has already made changes to meet many of the issues raised, including revising its governance structure to improve processes, publishing its register of interests and investing in its enforcement division.
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