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The FRRP has been an important establishment, providing managers and directors with fundamental tools needed to appreciate and apply different accounting policies in appropriate circumstances. Nevertheless, the framework requires consistency and there is still a great deal of room for interpretation and opinion. Very little emphasis is given to the underlying concept of stewardship and the "true and fair view", which is a fundamental loophole. The true and fair view is considered to be an elementary aspect of all accounting information, yet there is a lack of coverage of issues relating to it.Â
It is a fundamental requirement of the law for a company to produce a good set of reports and accounts. The need for a complete and accurate publication of accounting information goes beyond the basic compliance of accounting standards. Financial statements must be complete and accurate; this includes the characteristics of corporate reporting, which are believed to make a concise annual report.
Undoubtedly, the risks and uncertainties described in the business review are genuinely the principal risks and uncertainties about which the Board are concerned. The operational performance, goals and projections, in particular, are described specifically for the reader to understand. The business review also describes the mitigating actions taken by the Board to manage the impact of its principal risk and uncertainties to make sure they show a true and fair view.
Most companies provide a good standard of information in their financial reviews, the description of objectives and strategies, and their key performance indicators (KPIs). However, there are significant opportunities for improvement in the reporting of principal risks, trends and factors, as well as of non-financial KPIs.
Moreover, while there are positives that have derived from the conceptual framework, there are many ambiguities still current that allow considerable judgement to be exercised, in my opinion. For example, the framework is not a standard, which raises the question of whether auditors and directors will adhere to it. In contrast to the framework, we fail to see that the qualitative characteristics of financial information possess a relevant and reliable relationship.
The level of flexibility in accounting standards and lack of effective enforcement within smaller companies have combined to lead to a variance in opinions regarding the FRRP. However, since the function of the FRRP is dependent on the needs of users and their responsiveness to constant development in accounting standards, the accounting theoretical jigsaw is never likely to be complete: when one problem is resolved, another may appear.
The central contribution of this dissertation is to lay theoretical foundations and analyse the Financial Reporting Review Panel (FRRP) and its implications for the quality of annual reports.
Companies are able to manipulate their results while still claiming to comply with accounting standards and auditors appeared powerless to prevent them. However, it has been suggested that some auditors were supporting their clients' creative accounting. This being found out, it was damaging the credibility of financial reporting and auditing in the UK. The FRRP is in place to reduce this impact and to apply the stewardship theory of relevance and reliability within financial information.
The paper is organised as follows: the second section examines the background of the introduction of a new regulatory framework in the UK; the third section explains this new regulatory framework and discusses the extent to which UK companies adhere to accounting standards; the fourth section analyses the cases dealt with by the FRRP; the fifth section examines the relationship between auditors and the FRRP; the sixth section provides conclusions.
The need for accounting standards:
Accounting standards is an important aspect of financial reporting, helping investors to make well-informed decisions. "Investors need relevant useful information to make their decisions" (Levitt, 1998, p.1). According to Levitt, this is what "high quality accounting standards deliver". In other words the purpose of financial accounting is to provide relevant information to important people within the organisation. Today, the standards previously known as SSAPs (Statements of Standards Accounting practises) are known as FRSs (Financial Reporting Standards). Only a few SSAPs are still in use today. Prior to 1990, accounting standards were approved and issued by the ICAEW (The Institute of Chartered Accountants in England and Wales) (1976-86) along with other accounting bodies, following recommendations from the ASC, a reformation of ASSC (Accounting Standards Steering Committee) who is a member of the ICAEW.
Sometime during the 1990s, accountants started talking about "sustainability", which drew everyone's attention to globalisation. As the world's economies became more and more interlinked, the ASB diverted attention to the harmonisation of accounting standards. Many countries are even trying to adopt a common set of reporting standards. The IASB includes more than 100 countries that have implemented IFRS and those that haven't plan to do so. In the US, the SEC (Security Exchange Commission) allows compatibility for foreign companies to access US capital markets. In the UK, however, they are obliged, under the European Union, to follow IFRS rules. In the European Union, companies must prepare their consolidated accounts in conformity with IFRS if, at their balance sheet date for financial years starting on or after 1 January 2005, their securities were admitted to trading on a regulated market of any EU Member State (European Union, 2002).
As the GAAP has now converged with the IFRS in Europe as well as Australia, a similar rule applies. In July 2002, the Australian FRC proposed that Australia replace its GAAP with IAS by 1 January 2005 (www.iasplus.com). The FRC agreed to make its decision regarding the adoption of international accounting standards by Australia final from 1 January 2005 (source: www.frc.gov.au). This was the first published financial statements in 2005 using IFRS rules. Others published accounts according to their year-end date. The UK mandatory adaption of the new standards has many benefits although there are arguments to the contrary, a subject of debate for many academics and practitioners. The IFRS brings significant improvement in the quality of annual accounts. IFRS increases transparency and allows comparability of financial reporting. The European Commission provides the following reason for obligating one set of accounting rules, The IFRS across the EU (European Union, 2002).
These are as follows.
Allows for high quality financial reporting standards compared to the many different local standards in force (GAAP) and allows firms, which are listed to compare financial statements across the market.
The new rules are more "efficient and cost effective" to the capital market thereby protecting their investors by maintaining and increasing confidence in the financial markets, reducing the cost of capital in the EU.
To increase global competitiveness of firms within the EU improving the EU economy.
Some arguments against IFRS are the 'transparency' argument: Ewert and Wagenhofer (2005) argue that IFRS reduces the level of earning management and improves reporting quality. However reducing the amount of reporting discretion in fact makes it harder for firms to share information through financial statements (quote Watts and Zimmerman, 1986).They further add that there is regional differences because these areas may not be reflected (Ball et al., 2003; Ball, 2006) in which a single set of standards might cause divergent accounting systems to arise (Ali and Hwang, 2000; Ding et al., 2007).
The comparability argument: this argument is established on the basis that IFRS reporting makes it less costly for investors to compare financial data across markets. This goes to show that even though the quality of financial reporting does not improve, having one common set of accounting standards could help investors to characterise between the qualities of a firm's value. This could increase the lack of symmetry in information among investors and may lower estimation risk.
In the same light, Barth et al. (1999) also suggests that the cost for a country's investors for another country is reduced when the GAAP for the two countries become more similar. Adopting IFRS can improve earnings quality through monitoring by investors, whose cost of acquiring expertise is reduced. Adopting IFRS reduces the cost of comparing firms across borders; it also reduces the cost to the investor of evaluating the quality of financial reports between two firms. The level of increased comparability now puts pressure on managers to reduce earnings management. Moreover with the IFRS being adapted in several countries, common standards may lower the cost to analysts of monitoring and evaluating the performance of firms across countries (Ball, 2006). On the other with accounting becoming more diversified, it could be a barrier to cross-border investments (Bradshaw et al., 2004). In other words the global movement towards IFRS reporting may then facilitate cross-border investments and the integration of capital markets (Covrig et al., 2007).
I think we can say that a single set of globally applied, high quality accounting standards that are consistently applied, interpreted and enforced to underpin investor confidence, which is essential for the wider acceptance of IFRS.
Accounting Standards in the UK:
The evolution of accounting standards over time has changed of the years in how the UK has arrived at accounting standards. Before the 1970s accounting firms in the UK used an inductive approach which focused on existing practises and accounting standards. In contrast a deductive approach was much preferred by economists because it was believed to focus more on the true income which was found to be more useful to investors, however because it did not focus on accounting practises it did not prevail (Elliot and Elliott, 2009). This led to the general consensus of the IASB's conceptual framework containing a set of principles set out in their "Statement of Principles for Financial Reporting".
The ASB sees materiality, quality, relevance, reliability and comparability and understanding ability as important principles that make financial information useful and these principles are consistent to those of the IASB. These are seen to be beneficial as to providing standard setters with key guidelines. Elliott (2009) sees comparability as a fundamental advantage because the financial results of companies can be compared more easily which is seen to enhance the credibility of the accounting profession. Hence the development of the conceptual framework is very influential in disciplining the markets by watching what companies are doing and taking disciplinary action on companies who fail to comply with the accounting practises (Elliott and Elliott, 2009).
A good set of principles sets out a foundation on which accounting standards are based. Shipper (2003) states that accounting principles are needed for financial reporting in which the UK financial accounting standards in the most part are based. However Shipper criticises the rule based elements contained in the conceptual framework, which lead to the "compliance mentality" and "has led to arbitrary accounting treatments" (Shortridge & Myring, 2004). The authors here portray that the problem comes from principle-based standards becoming rules-based which has a negative effect on financial reporting in an effort to increase comparability and consistency. This argument is also backed by Nobes, 2005, who agrees that in some cases an increase in clarity can mean a reduction in the compliance with the rules.
Despite the benefits of accounting standards to the investors, there are other disadvantages of having such complex standards, which are costly to the economy as well as to businesses because they have to comply with the accounting regulations including general costs to produce financial statements. This benefit should outweigh the cost that occurs. Lochner (1990) proposes a cost-benefit analysis to show the effectiveness of accounting regulation. Complex accounting standards can slow down some businesses (Elliott, 2009). However accounting standards too relaxed may lead to corporate scandals such as the fall of Enron and world.com. In contrast Lochner (1990) recognises that accounting standards developed must bear in mind both the effectiveness, helping to keep investors safe and the costs involved for companies as well as the economy as a whole.
Also, problematically, standards may sometimes be set by an aggregation of bodies such as the ASB in the UK, the IASB, which issues international accounting standards, and also financial reporting regulations that are imposed by the EU. This increases complexity and overload and may lead to lobbying by powerful players in the economy that influence the standard setters to make decisions and set standards in favour of those players (Elliot & Elliot, 2009).
Moreover accounting standards are a vital part of modern financial reporting, the scope of which is debatable. Well formulated and structured accounting principles on which accounting standards is a strong basis for financial reporting that take the needs of the user into account. On the other hand, as research has brought to light, accounting standards that are very much rules-based can confuse the user and the practitioner and may lead to a "check-box" mentality (Schipper, 2003) which lacks professional judgement and can be detrimental to the performance of the business and the needs of the investor.
Development of IFRSs:
Interested parties including national standard setters and IASB staff can influence the agenda of the IASB. Any projects undertaken by the IASB can either be carried out alone or jointly with another standard setter (ICAS, 2009).
The IASB uses the Framework and consultative procedures to develop its accounting standards. Consultative procedures govern the standard-setting process of IFRS in order to gain a wide range of views of from interested parties across all stages. These procedures are designed to ensure: transparency and accessibility; extensive consultation and responsiveness; and accountability. (ICAS, 2009)
The global financial crisis brought a sharp focus on some of the fundamentals of financial reporting, such as who are the primary users of financial reports. As companies develop and expand, there are new strings created which require standards to be refined and updated.
The need for a critical change will ensure differences are eliminated between the IFRS and GAAP. Â Given the developments since 1989, the framework looks increasingly out of date. The objective of the conceptual framework project is to create a sound foundation for future accounting standards that are principles-based, internally consistent and internationally converged (Bence and Fry, 2010). Both the SoP and the framework adopt a 'substance over form' approach to accounting. The ASB has developed a Statement of Principles (SoP) for financial reporting, which it uses to revise or develop accounting standards. These principles are based on those of the IASBs conceptual framework for the preparation preparing financial statements. However, the US standards are generally more detailed in the exact accounting treatment for particular situations in comparison to the internationals principles-based approach (ICAS, 2009).
Background: Development of the FRRP:
The FRRP was established in 1991, following recommendation by the Dearing Committee. It is commissioned by the government and its role is to investigate corporate failures and scandals involving poor accounting and reporting in the 1980s. The committee was appointed in 1996 to make recommendations on how the purposes, shape, structure, size and funding of higher education, including support for students, should develop to meet the needs of the United Kingdom. The FRRP came in to force due to concerns about abuses subject to the consistent application of accounting requirements. During the late '80s and early '90s a series of high profile financial scandals and unexpected corporate failures raised concerns about the integrity of UK financial reporting and the effectiveness of accounting regulation (Shah, 1996: Smith, 1992). The FRRP contributes to enhancement of good financial reporting in the U.K. through enforcement of the accounting requirements of the Companies Act 1985 including applicable accounting standards, in the annual financial statements of public and large private companies (Brown and Tarca 2007). This body has the power to obtain a court order on companies who fail to rectify their accounts for not complying with the requirements of the Companies Act 1985. In 2004 the FRRP was given authorisation by the government in taking a proactive role in relation to the enforcement of accounting standards. Like the FRRP, the Financial Services Authority (FSA) plays an active part amongst other enforcement agencies in the UK and internationally.
The FRRP is a subsidiary of the Financial Reporting Council (FRC) whose role is to promote high standards of governance to regulate PLCs and large private companies. The FRRP was developed to enhance auditor's conductivity; however there have been tensions surrounding the effectiveness and enforcement of qualified audit reports (Jupe, 1999).
Over the 19th century there have been several changes to the FRC in order to enhance financial reporting such as: the transfer of APB's responsibilities widened the ethical standards of auditors: the POB was set up under the FRC to reflect public interest via the newly formed AIU (Audit Inspection Unit) publishing their findings. The FRRP then took over the situation in reviewing public interest accounts. The UK Corporate Governance Code enhanced the role of the audit committee under the FRC to interact with auditors in auditing accounts (Fearnly et al, 2000).
Prior to the establishment of the FRRP wide reports were made against auditors about the excessive use of creative accounting. The previous regularity regime did not enforce the relationship between directors and auditors. Jupe (1999) expressed the standard setting process was too lengthy and administrative which led to directors manipulating accounting interpretation. Up and till 2004 the FRRP worked as a reactive body. This meant the body would only see cases which were brought to its attention (by individuals, companies and press comments). The FRRP has now been promoted to act as a proactive body (Hines et al., 2001). The FRRP also works closely with the FSA to identify issues and companies to target, based on risk assessment models.
The FRC currently incorporates six operating bodies:
Accounting Standards BoardÂ (ASB)
Financial Reporting Review PanelÂ (FRRP)
Accountancy & Actuarial Discipline BoardÂ (AADB)
Professional Oversight BoardÂ (POB)
Auditing Practices BoardÂ (APB)
The role of the FRRP in monitoring and enforcing standards:
The UK accounting system for monitoring and enforcement has been subject to several changes over the last few decades. Prior to 1990 accounting systems were not backed by legal parties, which meant that accounting standards was monitored and enforced by the accountancy profession. After 1990, this was strengthened by the Dearing Report (1988) and the Company Act 1989 (replaced by the Companies Act 2006). This Act requires directors of PLCs and other large companies to disclose any departures from accounting standards in their annual reports. Although the Accounting Standards Committee (ASC) was supplanted by the Accounting Standards Board (ASB) in 1990, the ASB did not monitor or enforce accounting standards. Nor did the Financial Services Authority (FSA) play a part in enforcing compliance with accounting standards. This responsibility was given to a separate panel; the FRRP, which was set up to be independent body of both the profession and the government and monitor public and large private companies. Since the inception of the FRRP, it has played an important role in examining financial statements that show material departure from the Act. However the panel is restricted to what company it investigation. It deals with cases, which are brought to its attention along with showing a true and fair view and therefore does not monitor all companies. They also have the power for the order that the directors of the company to prepare the revised statements.
After evaluating the workings and assessed the effectiveness of the panel, Hines et al. (2001) concluded that the FRRP was "an effective regulator, concerned to establish its legitimacy, despite its limited powers". Likewise Peasnell et al. (2001) researched the companies who showed defective financial statements were more likely to be suffering from performance difficulties and was audited by much smaller accounting firms and had a high proportion of outside directors. On the other hand Fearnley et al. (2002) showed that although the FRRP has regularity authority over directors not auditors, it has induced auditors to improve accounting compliance as well as enhance their independence.
Â CESR plays an important role in the endorsement, implementation and enforcement of IFRS and auditing practices in the EU. CESR is a group of experts in financial reporting who co-ordinate the work of CESR members in the area of financial reporting allowing them to play an important role in the implementation and enforcement of IFRS.
In a speech by John Tiner on 25th October 2004, he talks abo0ut some of the work CESR is doing. Shown below is some of the work CESR is undertaking amongst other accounting standards with IFRS:
Improving co-ordination amongst securities regulators. This is being achieved by developing the effectiveness of operational networks to enhance the supervision and enforcement of the single market for financial services.
The CESR acts as an advisory group to assist the EU commission. In particular relevance the CESR are preparing draft implementation measures of the EU directives (securities). Currently they are advising the EU commission of combining the GAAPs with IFRS; and
Thirdly CESR is working on ensuring the consistent and timely implementation of legislation in the member states. Although this work is carried out by the FRRP under the supervision of CESR's vice chairman.
In light of the Enron case amongst other accounting scandals the FRRP became more proactive in working with the FSA. In 2005 the panel was given extended powers by the government under the companies Act 2004 to ensure companies complied with IFRS in the intervening time as well as compliance with the accounting requirements of the FSA rules, the operating and financial review (OFR) and the director's reports. The FRRP role is to act both proactively and reactively. It selects which financial statements which are to be review and works alongside the FSA and its Advisory group on the sectors which are likely to give rise to accounting issues for example where corporate governance is poor. The panel also responds to issues brought forward by the public and from the press. It then makes a conclusion based on the company under review have agreed that their statement were defective which have been corrected as specified by the panel. Likewise no announcement is made when a company's reports had been found to be defective. In such cases the panel will release a press notice about the matter which has come to its attention without naming companies also known as an 'Activity report'.
Relationship between companies, auditors and the FRRP:
An auditor's presence is crucial in regulating the performance of companies. Auditors can also be held liable for negligence. The FRRP has no jurisdiction to enforce punishment on negligent auditors; they can only refer them to professional bodies such as the SEC (Securities Exchange Commission) on accounts, which are found to be defective. However with the SEC lacking powers, the FRRP refers auditors to ICAEW investigation committee (Jupe, 1999).
The FRC has developed codes and standards which are in place to guide audit and assurance commitments. These are commitments which are usually in the public interest within the UK. The FRC also plays a significant role in international auditing and assurance standards.
There are several teams in place within the FRC which undertake a number of activities that are relevant to auditors:
An "Audit Quality Review" team monitors the audits, policies and procedures of publically listed and other entities of interest to the public in the UK.
There is an "Independent Disciplinary" Body for auditors and audit firms. This team deals with cases on misconduct and issues affecting the public interest.
The FRC also conducts "Professional Oversight" responsibilities which act as supervisory bodies. These bodies are responsible for ensuring that statutory auditors comply with regulations.
The UK fiscal authorities (HMRC) are authorised to disclose information on company accounts to the panel. In respect of auditors the companies Act 1989 supervises all auditors in the UK. The Act requires auditors must be registered (names inscribed on the statutory register). Professional bodies such as the Institutes of Chartered Accountants and the Association of Chartered Certified Accountants supervisor their members both in the public and private interests. This combination however can lead to conflict of interest. For the Consultative Committee of the Accountancy Bodies (CCAB) proposed the establishment of an independent review board. In total five bodies were set up: Accountancy Foundation, a Review Board who would monitor the operation of the system to ensure the public interest is met, an Ethics Standards Board (ESB) which was given the role of securing ethical standards for all accountants, an Accountancy Practice Board (APB) and an Investigation and Discipline Board (IDB) who deals with disciplinary cases concerning the public. Dewing and Russell (2002) pointed out the accounting foundation has a direct responsibility for discipline via IDB and an indirect responsibility for auditor independence via ESB, but does not hold responsibility of monitoring audit quality. Although it is the auditor's responsibility to handle the compliance of standards of individual companies, these are much feebler when monitoring those companies following IFRS. On the other hand private companies are no longer required to be audited.
Criticism of the FRRP:
It lacks independence as cases have to be brought to its attention (Brown and Tarca, 2007). Prior to 2004, cases were referred to the FRRP. The FRRP had discretion over the cases it pursued, but did not control the cases brought to their attention. Therefore the FRRP had limited control over the extent of matters it considered.
FRRP v AISC:
In this section I will compare two regularity bodies: FRRP and the Australian Securities and Investment Commission (AISC hereafter). Both bodies play a crucial role in the regulation of financial reports each have a distinct method of approach in how companies are investigated (Brown and Tarca, 2005). As a whole the FRRP regulates a larger amount of companies then the AISC. The AISC was created on 1 July 1998. This was set up by the Australian government as a statutory body and was given the necessary powers for the oversight of the regulation of financial market, securities and corporations including consumer protection in insurance and deposit taking. Like the SEC the AISC was created following the financial crisis and the accounting practises in question (Clarke et al., 2003). In the aftermath of the corporate scandals of the Enron era and the recent financial crisis, policy makers and regulators have called for improved quality of financial reporting and greater transparency.
Despite being located in two countries, they are regarded as having much in common in terms of legal, accounting and financing systems (Nobes and Parker, 2004, pp.60-68). However the bodies reflected different approaches when enforcing their duties amongst defective company reports, which, in turn, influenced their operations and outcomes.
By 30 June 2004 the FRC observed more similar activities being adopted by the two bodies.
Changes included, for the FRRP, the introduction of proactive surveillance, which meant they could review more firms and formal links with other regulatory organisations in the UK (FRC, 2005). In contrast, the ASIC, a Financial Reporting Panel was to be set up, thus incorporating elements of the UK's approach (such as the use of peer review of financial reporting practices) into the Australian enforcement environment (Pound, 2004).
Enforcement bodies act as a deterrent to the non-compliance of standards. However ensuring compliance by creating enforcement bodies is particularly difficult to measure i.e. from the number of cases publicised.
i.e. the FRRP acts only on cases brought to its attention from individuals and companies and from the media (Hine et al., 2001). Over the period 1998-2004 ASIC has a much greater scope than the FRRP when enforcement of financial reporting requirements. ASIC had increased the scope of its operations. Unlike the FRRP the ASIC did not require new powers under the ASIC Act. Some powers include investigation and examinations of companies who failed to comply with the legislations (Gooley, 1999). Therefore during the majority of the study period, the actions carried out by FRRP's are generally referred cases. The FRRP had power with regards to deciding what should be done with the cases they were reviewing, however no particular control over the cases brought to it had. In relation to this, cases were bought about from other sources including complaints from companies and auditors raised by the ASX and by ASIC.
Do we need both the AISC and the FRRP?
Prior to adoption of IFRS, ASIC and the FRRP were responsible for promoting compliance with company law and national accounting standards in their respective jurisdictions. Adoption of IFRS does not change their role, but it leads to the demand for consistent and comparable enforcement decisions from bodies in different countries (CESR, 2003a).
Like the SEC the FRRP and ASIC work to educate the financial reporting community. For example the FRRP released a press notice reminding companies of the issue relating to financial instruments (Peel, 2001). Unlike the SEC the two enforcement bodies do not make accounting rules but regularly state how standards should be applied. Press notices imply that further actions could be taken if companies do not improve their practises.
However measuring the effectiveness of an enforcement body is difficult. This is considered to the extent to which the body meets its objectives. The AISC has a responsibility to maintain, facilitate and improve the performance of financial statements. However this outcome associated with achieving its objectives is difficult to quantify.
As the world's economies join together and adopt a single financial regulation such as the ones set out by the IASB. Therefore enforcement bodies must be set up to promote consistent application of IASB. In relation to this the FRRP in the UK and the ASIC in Australia have different structures and some differences in their activities and powers. Comparing the different activities of ASIC and the FRRP in relation to the compliance of accounting requirements set out by Fearnley et al. (2005) the results show that although both bodies have their share of differences (in the number of cases publicised) they both had a similar impact on the company's enforcement decisions.
Shown below are some of the cases the ASIC and FRRP underwent during the period 1998-2004. The results suggests that ASIC has a greater number of publicised cases most of which arose from lack of appliance in fundamental accounting rules such as recognition and measurement of assets/financial instruments.
Work of the FRRP and an evaluation of its effectiveness; (example cases)
A leading automotive retailer accounts were reviewed by the FRRP as at 31 December 2011. There were alleged concerns over the company's presentation of cash flow from their hiring operations. An error was found in the restatement of matching figures in the 2011 consolidated cash flow statement. Pendragon PLC reported an overstatement of £31.3 million in its operating and investing activities. The operating activities were originally reported as £83.9 million, which therefore should have been reported as £52.6 million. Net cash flow from investing activities, originally reported as £55.1 million, should have been stated as £23.8 million.
As a result the directors were ordered to reclassify net cash flows of £31.3 million to the company's contract hire operations. The FRRP found that there was no impact on the opening and closing which were previously reported (cash balances, the income statement or the statement of financial position).
Cambrian Mining PLC:
Cambrian Mining PLC is a more complex case then Pendragon PLC. Its reports and accounts were reviewed for the year ended 30 June 2006. The review resulted in Cambrian suspending its AIM (Alternative Investment Market) shares and a loss of £4.6 million, originally stated as £40 million profit. Also new Auditors had to be brought in.
A press noticed was released in December 2005 when the FSA fined the director, Jonathan Malin, £25,000 for abusing the market by buying shares ahead of the company announcements. The 2006 accounts were found to contain several mistakes and missing disclosures. The £4.6 million loss came from the restatement of revenue and operating profits, reflecting Cambrian's status as an operating mining company rather than an investment holding company.
At this point Cambrian Mining PLC was making its money from selling its investing rather than its operating activities. After Malin's departure, it wasn't until almost a year later the company recruited a replacement along with a financial controller. Moreover taking these staffing problems in to account the prolonged replacement was perhaps the reason why the accounts in 2005/96 were so problematic. However the accounting themselves were filled within the deadline and were approved at the AGM (Annual General Meeting) in November 2006. This review led to new auditors a new addition to the board and a new management team and the FRRP was not mentioned.
How does the FRRP impact on the way directors and auditors of UK domestically-listed companies interacted with each other to reach key financial reporting decisions?
After the Enron debacle of 2001, UK companies and their auditors were hit by an avalanche of regulatory change surrounding financial reporting, auditing, corporate governance and enforcement. The changes enhanced the role of the UK Financial Reporting Council in a number of ways. Responsibility for the Auditing Practices Board was transferred to the FRC and its remit widened to include the setting of auditors' ethical standards in addition to auditing standards. The Professional Oversight Board was set up under the FRC with a mandate to inspect public interest audits via the newly formed Audit Inspection Unit (AIU) and publish findings. The Financial Reporting Review Panel (FRRP) became proactive in reviewing public interest accounts. The UK Corporate Governance Code enhanced the role of the audit committee, particularly in relation to its interactions with auditors. In addition, for December 2005 year ends, UK-listed companies were required by EU regulation to prepare their group accounts under International Financial Reporting Standards (IFRS) and at the same time the APB decided to adopt International Standards on Auditing (ISAs).
So how does this impact Auditors and Directors?
Auditors can be criticised by their client if the FRRP uncovers non-compliance that the auditors missed and they can also be criticised by the AIU if their auditing is found to be non-compliant with the auditing and ethical standards. Either of these events can damage a firm's reputation if it is serious enough and will also damage an audit engagement partner's career prospects.
However, whereas there was little criticism of the FRRP, not everyone was happy with the AIU although it was regarded as a formidable regulator. One finance director thought that auditors now had a dual focus: No only to do the job they are required to do when auditing a firm but also to make sure they complete audits to the highest standard reducing any chance of defective reports when inspected.
This high level of compliance is a positive message for the UK's post-Enron reforms and can be attributed to two developments: the enhanced involvement of the audit committee in audit and financial reporting related matters; and the combined influence of the FRRP's proactive regime for reviewing company accounts and the audit inspection regime. However, the underlying quality of what they are complying with may be a different story. The FRRP and AIU are effective enforcement bodies because this regime has greatly increased the risk for both companies and auditors of getting found out if they don't comply with the rules. Directors risk reputation damage and loss of management time if the FRRP catches them out with a material misstatement in their accounts. The risk applies particularly to the audit committee.
The enforcement of such professional bodies is very advantageous to the accounting profession. Some say when it came to approving audit fees, auditors were more concerned about getting a proper job done rather than putting the fee down. This would protect themselves and the committee against poor audit quality. The FRRPs help auditors because they can warn a client that non-compliance could lead to an FRRP enquiry.
The question addressed regarding the effectiveness of the FRRP considering its work of the study period 1991-2004) from investigating cases to issuing press notices have overall been found to be an effective body (Fearnley et al., 2000). . In addition, they considered views of representatives of regulatory bodies, audit firms and companies subject to investigation. The authors have concluded that the enforcement body has increased compliance with the financial reporting requirements in a cost effective manner. Therefore the need for such a body has been influential to the business environment in the UK.