Problems and politics of regulatory fragmentation: The case of the Financial Reporting Review Panel and the Institute of Chartered Accountants in England and Wales
| Date | 01 January 2000 |
| Pages | 16-35 |
| Published date | 01 January 2000 |
| DOI | https://doi.org/10.1108/eb025028 |
| Author | Stella Fearnley,Tony Hines,Karen McBride,Richard Brandt |
| Subject Matter | Accounting & finance |
Journal of Financial Regulation and Compliance Volume 8 Number 1
Problems and politics of regulatory
fragmentation: The case of the Financial
Reporting Review Panel and the Institute of
Chartered Accountants in England and
Wales
Stella Fearnley,* Tony Hines, Karen McBride and Richard Brandt
Received: 16th November, 1999
*Department of Accounting and Management Science, University of Portsmouth, Locksway Road,
Portsmouth, Hants P04 8JF; tel: 023 9284 8484; fax: 023 9284 4037; e-mail:
stella.fearnley@port.ac.uk.
Stella Fearnley BA, FCA, FRSA, is a
Reader in Accounting at Portsmouth Busi-
ness School. She is deputy chair of the
ICAEW's Centre for Business Performance.
Tony Hines MSc, FCA, is a Principal Lec-
turer in Accounting at Portsmouth Busi-
ness School.
Karen McBride BA, MSc, ACCA, is a
Senior Lecturer in Accounting at Ports-
mouth Business School.
Richard Brandt MA, FCA, FRSA, is a
Research Fellow at Portsmouth Business
School and was formerly Head of Audit at
Grant Thornton.
ABSTRACT
The UK regime for financial reporting and
auditing was radically altered in 1990 and
1991 by two separate developments. When
removing sole
responsibility
for setting account-
ing
standards
from the accounting profession,
the opportunity was taken to establish a moni-
toring body, the Financial Reporting Review
Panel (FRRP), to oversee compliance with
company law and accounting standards, and
with powers to apply to the
courts
for
rectifica-
tion.
In addition, a new regulatory system for
auditors was set up. This paper considers the
problems arising between the regulatory respon-
sibilities of the Institute of Chartered Accoun-
tants in England and Wales (ICAEW) and
FRRP. In 50 cases (up to September 1999)
FRRP found defects in accounts, 49 of which
were audited by firms regulated by
ICAEW,
but no disciplinary action was taken by
ICAEW until 1999. The way in which the
new audit regulations were grafted onto the
existing ICAEW disciplinary regime is
consid-
ered,
and the anomalies arising from that
explored. The
cases
resulting in ICAEW's dis-
ciplinary action are compared with the other
cases together with some
evidence
from finance
directors and audit partners with experience of
dealing both with FRRP and an ICAEW dis-
ciplinary investigation. The relevant theories
relating to professional
bodies
and
regulation
are
also reviewed. Finally, the authors review the
problems identified in this study and make sug-
gestions as to how they may be
addressed.
INTRODUCTION
In this paper the authors investigate and
discuss problems which have arisen
between the regulatory responsibilities of
Journal of Financial Regulation
and Compliance, Vol. 8. No. 1,
2000.
pp. 16-35
© Henry Stewart Publications,
1358-1988
Page 16
Fearnley, Hines, McBride & Brandt
the Institute of Chartered Accountants in
England and Wales (ICAEW), the largest
UK accountancy body, and the Financial
Reporting Review Panel (FRRP). The
problems have arisen following significant
changes to the UK regime for financial
reporting and auditing, which were intro-
duced in 1990 and 1991, and have emerged
from cases where the FRRP has found
defects in the accounts of companies
audited by firms regulated by the ICAEW.
There have been 50 cases between 1992
and 30th September 1999, in 49 of which
the auditors are regulated by the ICAEW.
See Table 1 for an analysis of these cases.
The establishment of the FRRP was
greatly welcomed by the ICAEW.1 It is
believed to have enhanced the quality of
financial reporting2 and perceptions of
auditor independence.3 No disciplinary
action was taken by the ICAEW against
the auditors in any FRRP cases for seven
years,
however. Then, in 1999, disciplinary
action was taken against audit firms in
three cases and also against the finance
directors of two companies who were
ICAEW members.
The objective of this paper is to review
the UK regulatory framework for financial
reporting and auditing and to seek to
explain the profile of the ICAEW's disci-
plinary actions in respect of FRRP cases.
The paper is structured as follows. The
second section sets out the background to
the changes to the UK regulatory frame-
work introduced in 1990 and 1991 and the
subsequent impact on the ICAEW's disci-
plinary regime. The third section is a
review of relevant theories relating to pro-
fessional bodies and regulation. In the
fourth section the attributes of the
FRRP's cases are considered in the light
of the ICAEW's recent disciplinary
actions. The authors' findings are sup-
ported by some evidence from interviews
with finance directors and audit partners
who have experience of dealing both with
the FRRP and with an ICAEW disciplin-
ary investigation. In the final section the
authors discuss and conclude on their find-
ings.
THE 1990-1991 CHANGES TO THE UK
REGULATORY FRAMEWORK AND THEIR
IMPACT ON THE ICAEW'S
DISCIPLINARY PROCEDURES
The framework before 1990
The regulatory framework for financial
reporting and auditing in the UK had
developed both from company law and
pronouncements from the UK accountancy
bodies. The UK accountancy bodies4 were
responsible for setting accounting and
auditing standards applicable to limited
companies, with some oversight from the
Department of Trade and Industry (DTI).
The standard setting process was lengthy
and bureaucratic, and the standards lent
themselves to flexible interpretation. There
were no effective enforcement mechanisms
to ensure that directors and auditors com-
plied with the framework.5 The DTI and
the professional bodies normally only
intervened in cases where there was a
major financial scandal and investors had
lost money.6 As a matter of routine the
professional bodies investigate complaints
about their members' conduct, which
include complaints about the quality of
audit work, but complaints normally only
arise in this context where the complainant
has a specific grievance.
The changes to the framework for finan-
cial reporting were introduced because of
concerns about abuses of the regime in the
1980s, which came to be referred to as
creative accounting.7 Because of the flex-
ibility of the standards and lack of effective
enforcement, companies were able to
manipulate their results while still claiming
to comply with accounting standards, and
auditors appeared powerless to prevent
them.8 It was also suggested that some
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