Accountants’ watchdog straining at the leash for greater powers

This time last year, Richard Moriarty was back at school. The 51-year-old had just been appointed to lead the accounting watchdog, the Financial Reporting Council — despite having no background in bean-counting — and soon found himself in a classroom, learning the basics of auditing. It was a lot to get his his head around.
“Don’t quiz me,” he laughed. “It was like trying to drink out of a fire hose.”
Moriarty, a mild-mannered mountaineer who has scaled Everest, is a veteran regulator. Before taking the helm of the FRC, which keeps the country’s 357,000 accountants in check, he held top jobs in the aviation and energy regulators and at the postal service watchdog.
But his latest role has brought with it deep frustrations. He did not sign up to lead the FRC; when he took on the top job, he was promised that the regulator would be replaced by a new body with stronger, sharp-toothed powers to scrutinise rogue auditors and directors. It was to be named the Auditing, Reporting and Governance Authority (Arga), first promised by Theresa May’s government in 2018 after a slew of corporate failures at Carillion, BHS and Patisserie Valerie. Those commercial catastrophes could, arguably, have been prevented had the companies’ well-paid auditors done their work more diligently.
But, a year in, Moriarty is still waiting to be given the powers he feels he needs to keep investors, suppliers and employees safe. “It’s long overdue. It’s the right thing to do. It may sound a bit boring and bureaucratic, but it’s really important,” he said.
In July he came slightly closer to getting what he wants, when the new Labour government announced in the King’s Speech that audit reform would come into law. But Moriarty has had his hopes dashed before. “We’re very much hoping that we’ve now got the critical momentum … to finally get this over the line,” he said.
While the new body was always meant to be based in Birmingham to help the Midlands “level up”, it will now operate under a “twin-hub model” with London. “[Having a headquarters in Birmingham] was based on the assumption of Arga being delivered well before now; I’m dealing with the reality of today.”
So, other than the Arga hiatus, what are the key frustrations for this watchdog?
Perhaps most critical is its basic set-up. In its current form, the FRC is reliant on voluntary funding from the audit firms that it regulates, and — almost unbelievably — it cannot compel firms to hand over information during investigations. “It is clearly not a sensible, sustainable position,” Moriarty said.
The FRC can also only investigate trained accountants, meaning that rogue finance directors who are not qualified accountants are outside its remit. “We need to modernise the nature and the scope of regulations and match how modern business is currently done,” he said.
Another glaring gap in Moriarty’s armoury is that the FRC can only investigate the bookkeeping of “public interest entities”, largely defined as stock market-quoted companies. There are, then, scores of firms, employing thousands of people, whose accounting falls out of his remit merely because they are not on the stock exchange — which no longer hosts many big companies because they have been bought by private equity firms. So, had Carillion been owned by a Blackstone or a CVC, there would probably have been no investigation into its auditors’ failure to spot the looming catastrophe.
It’s not only big corporates that have been snapped up by private equity; increasingly, accounting firms are going the same way, overhauling decades of traditional ownership by partners. Grant Thornton is in the process of selling a majority stake to private equity, and wealth manager Evelyn Partners is also trying to sell its professional services arm.
Next on the block is Cooper Parry, the regional accounting firm that has hired investment bankers at Houlihan Lokey for a private equity sale — one that could fetch up to £600 million.
The FRC has warned that increased private-equity ownership could also pose risks for the quality of audits, as the new owners may either lack audit knowledge or pursue short-term growth and quick profits. But the boss sounds more relaxed; “I don’t think it is either helpful or right to speculate that it could be a good or bad thing; I think it depends on how it’s done. And I think part of that is that we need to engage early,” said Moriarty.
Moriarty has written to Britain’s accountancy practices, and private equity investors, urging them to notify him before embarking on takeover talks. “Most of the audit firms know that the expectation from us, if they consider a major change in their circumstances, is to talk to us early. And I think a firm would either be naive or stupid to breach that convention,” he added.
His predecessor, Sir Jon Thompson, frequently lambasted the “big four” firms — PwC, EY, KPMG and Deloitte — for audit failures, and pushed for greater competition from smaller mid-market firms, such as BDO and Grant Thornton.
How times have changed. The FRC’s recent audit-quality review heaped praise on the biggest players, while singling out BDO and Mazars for poor performance. “The big four have improved over the last five years … but we have noticed that the pace of improvement around quality has not been matched in other parts of the market,” said Moriarty. “As the football manager might say, it’s a results business — and we haven’t seen results come through yet in terms of their audit quality.” Last year, the FRC launched Scalebox, an advice service for smaller firms that are struggling with a big audit.
The push for quality has come at a price. Since 2018, when the regulator started pushing its reform agenda, the cost of audits for UK-listed companies has soared by 75 per cent, according to The Quoted Companies Alliance. Moriarty is more concerned with audit costs for small and medium-sized enterprises (SMEs), than for finance directors of FTSE stalwarts. “A lot of SMEs require an audit to get access to basic capital — to grow and thrive,” he said.
The FRC is conducting a study on the SME audit market to find out just how onerous audit costs can be. It is also developing a best-practice guide for auditing smaller businesses so that accountants do not overload them with excessive services.
Few children grow up wanting to become accountants. Fewer still would pursue a career after hearing of the gruelling hours that young auditors have to endure during the busy season when company accounts have to be signed off. That has led to a chronic staff shortage in the audit sector, according to the Institute of Chartered Accountants in England and Wales, the trade association.
It evokes chilling memories for Moriarty, who was head of the aviation regulator when the industry was grappling with a lack of staff after the pandemic. “That was a bit of a brake on growth so it’s really important … It behoves all parts of the system to work together on making this sector attractive and resilient and making sure it speaks to the next generation of people coming into the market.”
Despite the frustrations with his toothlessness, Moriarty is far from despondent, 12 months into the job. “I’ve got a lot of energy. I’m really looking forward to the second year.”