Regulators grow their adult teeth
| by Peter Williams 06 May 2006 Topic: Corporate governance, The profession |
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Peter Williams looks at financial regulators post-Enron The US is a foreign country; they do things differently there, at least in terms of regulation. The US Securities and Exchange Commission (SEC) only got the power to fine corporates in 1990 and, since then, it has been getting the habit. Eyewatering fines of millions of dollars are handed out like confetti and one US lawyer reckons the fines in the three-and-a-half years since 2002 now exceed the fines handed out between 1990 and 2002. And if that wasn’t enough, the US seems to enjoy cuffing top executives and hustling them humiliated from their gleaming corporate head offices. That is not the way in Europe, or at least not so far, and direct comparisons between European countries such as the UK and Ireland and the US are not possible. The SEC is a unitary regulator responsible for market and corporate behaviour. In Europe the approach has been that of dual regulators. For instance, the UK’s Financial Services Authority (FSA) keeps an eye on the City, while the increasingly powerful Financial Reporting Council (FRC) looks after UK Plc, the auditing, accounting and actuarial professions. Paul Boyle, FRC’s chief executive, is conscious of the balance the regulators have to strike. “Somebody once joked that we want the Goldilocks solution, we want regulation to be just right, neither too much nor too little. What tends to happen is that whenever there is a scandal the newspapers and politicians demand action, asking why don’t we have more regulation to stop this from happening. Then, after a few years and people forget these scandals, they talk more about the busybody regulators.” Over the last few years it has been a case of more regulation, not less. A case in point is the formation of the Irish Auditing and Accounting Supervisory Authority (IAASA). It was established by the Companies (Auditing and Accounting) Act 2003 and is charged with supervision of the accountancy bodies, promoting adherence to high professional standards in the auditing and accountancy profession, acting as an adviser on auditing and accounting matters to the Minister for Trade and Commerce and monitoring the financial statements of certain companies (all Plcs and private companies with turnover of 50m euros or more). However, the sections of the act dealing with the latter function have not come into force yet, since the Authority only held its first meeting on 3 January 2006. Ian Drennan, IAASA’s chief executive and ACCA member, acknowledged at the time of the launch that Europe was the driving force. He said: “The Authority’s statutory establishment comes at a time when the EU has recently agreed legislation providing for, among other things, the establishment of independent auditor oversight systems in all member states. While member states are not required to give effect to this legislation until early 2008, the establishment of the Authority on a statutory basis at this time means that Ireland is well-placed from the outset to make its contribution to the EU-wide objective of enhancing public confidence in financial reporting and in the audit process.” Drennan says that, in a UK context, IAASA’s functions are broadly comparable with certain subsidiaries of the FRC—that is, the Professional Oversight Board for Accountancy (POBA) (1), the Accountancy Investigation and Discipline Board (AIDB) and the Financial Reporting Review Panel (FRRP). The Irish and British are used to sharing regulation; both accounting and auditing standards have a history in common, although those are less relevant now as international standards are taking over national roles. In the UK Boyle says that the main regulator that the FRC has to deal with is the FSA. Companies listed on the London Stock Exchange (LSE) are regulated by the FSA but the FRC through FRRP has the responsibility for reviewing financial statements. The two bodies are also co-operating on monitoring actuaries. The FRC will set the actuary standards and the FSA will watch closely because it regulates the insurance industry. It may not be an elegant solution but it is a practical one. And that is what regulators have to do, find workable solutions to the legal decrees laid down by their political masters. It can be messy. Take the position of a large UK accountancy firm. Because of the Sarbanes-Oxley Act (SOX), it will be regulated and subject to inspection by both the US Public Company Accounting Oversight Board (PCAOB) and the FRC. A few years ago such cross-border jurisdiction would have been unimaginable, but US scandals such as Enron have changed all that. Boyle says: “Co-operation is emerging between audit inspection authorities. We have been trying to make arrangements for the two (US and UK) inspection authorities to co-operate with each other as much as possible rather than duplicating. This is going to be really important in the future because of the Eighth Directive.” The EU’s Eighth Directive on Company Law should be in force by 2008 and has SOX-like characteristics. An auditor of a non-EU company whose shares are traded on a European market has to be registered and submit to European audit inspection. As London has listed companies from 40 different countries the audit inspectors are going to clock up some air miles. As Boyle says: “Some of these countries are quite small and may not have a fully developed equivalent to the FRC.” High on the agenda sees the creation of an international association of audit regulators similar to the International Organisation of Securities Commissions. But while bodies and acronyms proliferate, there is a concern to ensure that regulation is effective as well as efficient. Boyle says: “We want to make sure there are no gaps in regulation caused by different regulators being unable to speak to each other about what they are up to. We could have a situation where two regulators don’t deal with a situation because they think that the other one has dealt with it.” It is a complex web of regulation that is being woven both within individual jurisdictions and across Europe and beyond. If it manages to keep scandal at bay no one will notice; if it fails the system will be criticised by politicians. Of course, it is too early to judge whether Drennan’s IAASA will be a success, although he says: “We have identified a number of benchmarks by which our impact and success will be measured. In essence, they can be distilled into the overarching objectives of enhancing public confidence in the profession and in financial reporting and providing independent assurance that, where they arise, deficiencies in these areas will be addressed in an appropriate manner.” Confidence In contrast to the new Irish Authority’s aspirations, Boyle has a track record. The FRC, started in 1990 and given extra responsibilities in 2004, commissioned the polling company MORI to survey company directors and investors. Last year 95% of company directors were either confident or fairly confident about the standard of corporate reporting and, in the case of investors, it was 98%. MORI also asked them to compare the level of their confidence with 2001. They generally thought it had improved. That may seems impressive, but Boyle is cautious. “There generally seems to be a high level of confidence and, therefore, things are going well. However, there is no room for complacency and there continue to be lots of new requirements that affect corporate reporting that we need to keep an eye on. We said we would shift our resources from developing UK standards towards influencing the developing international standards and cross-border co-operation.” If UK regulators have a secret weapon they should share with their international counterparts, it is surely the review panel mechanism. With the US and international accounting standards converging, if not merging, reviewing accounts is a key topic in common. A company listed in New York as well as London can expect its accounts to be scrutinised by both the SEC and the FRRP. And so far the history of FRRP has been publicly at least a regulatory stroll in the park. Sir David Tweedie, now chairman of the International Accounting Standards Board (IASB), was the founding chairman of the UK’s Accounting Standards Board. In the 1990s, when he explained how the then fledgling FRC worked, his illustration for the FRRP was a picture of a gallows. It was a challenge to companies to test the powers of the regulator. So far no UK company has gone to court to do so. It is regulation by force of will as much as anything, but if Europe can recreate a similar structure to cap all its other systems and bodies, then corporate scandals may become the rarity they should be.
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