Draft Plan and Budget 2008/09

March 2008

FRC Draft Plan & Budget 2008/09 - ACCA submission to CCAB

General

ACCA is please to respond to the consultation document.

The consultation questions cover the assessment of major risks, but do not ask whether the components identified as contributing towards the achievement of the supporting outcomes are complete. In this respect, we note that Strategic Outcome Six (b) (iii) talks about effective working relationships with UK Government and other UK regulators, but does not mention effective working relationships with the professional bodies.

The Draft Plan covers a wide spectrum of subjects: corporate governance, corporate reporting, and auditing, actuarial practice, professionalism and FRC effectiveness. It is largely successful in addressing those areas from the perspective of Public Interest Entities. However, it shows little consideration of more than 97% of UK companies because of its focus on listed businesses. This is surprising in view of the fact that POB, for example, spends a lot of time looking at SMP issues and the quality of filed accounts.

Consultation Questions

Section Two - New approach to explaining priorities

1. Will the approach we have developed provide a clearer view of the judgements we have made and be helpful in obtaining better feedback on our assessments?

Overall, ACCA is supportive of the transparency and level of detail within the Draft Plan & Budget 2008/09 and the Supplementary Information. However, the explanation of how the FRC has arrived at its assessment of major risks is contained within the Supplementary Information, and this result in a level of duplication of information between the two documents.

There is also the possibility of confusion, as the reader is not guided logically through the process of establishing the strategic outcomes, supporting outcomes and components, and assessing the concerns and the major risks, resulting in the major activities and projects. Ie the division of information between the two documents detracts from the logical flow from identifying the Strategic Outcomes to identifying the major activities and projects. (Also, the distinction between serious shortcomings and significant concerns is not defined anywhere and is not obvious.)

Due to the level of repetition between the documents, insufficient detail has been provided in respect of the actual activities and projects planned. Sometimes (for example when the plan discusses concentration in the audit market), one has to read 'outside' the document to understand what the mitigating strategy is. (In respect of this example, it simply refers to the 'recommendations made by the Market Participants Group'.)

The document contains very few 'SMART' objectives, and it might be criticised by readers who perceive many of the 'proposed' actions as already being in progress and possibly even outdated. It would be useful to separate out those activities that are simply ongoing, and highlight other activities and projects that are considered to be priority. There is no clear recognition that timeliness is key to a regulator's response to emerging concerns.

2. Will the publication of our assessments be helpful in highlighting the priority areas for action to contribute to the achievement of the outcomes defined in the Strategic Framework?

The publications of the assessments, together with the FRC's bases for making their assessments are useful communications to assist stakeholders in contributing to the consultation. Stakeholders should also be aware of their responsibilities in recognising risks and avoiding downside scenarios.

However, note the comments made earlier regarding the possible confusion that could arise through the amount of repetition and the structure of the documents. (The links between the different sections are confusing.) There is a danger that the reader will not be able to determine the focus of the FRC amongst the detail of how the assessments were made. It may be preferable to present only the top line risks etc externally. The methodology to arrive at those top line risks may still be used internally by FRC to enable them to arrive at their conclusions.

The FRC should endeavour to ensure that the Plan is not perceived as using the assessments as a means of self-justification.

Section Three - Assessment of the major risks

3. Do you agree that our assessment of the achievement of the outcomes in our Strategic Framework, in the downside scenario, properly reflects the plausible risks?

We agree that the assessment of the achievement of the outcomes, in the downside scenario, properly reflects the plausible risks. However, it is not clear that the risks identified have been addressed. There are areas where the pri mary responsibility for achieving a Supporting Outcome does not rest with the FRC . However, the assessment of the achievement of the outcome and the identified risk could highlight an area where FRC could contribute. For example, Annex B to the FRC 's document 'Regulatory Strategy: Our Role and Approach' states that the APB's functions include contributing to efforts to advance public understanding. The FRC clearly has a role to play in communicating responsibilities to other parties.

4. Do you have any comments on the detailed assessments of the risks to the achievement of the outcomes in our Strategic Framework included in our document Draft Plan 2008/09: Supplementary Information published on our website? Is there additional evidence which should be considered in relation to these assessments?

Under Supporting Outcome One (b), it is noted that inappropriate regulatory requirements might threaten the adequate supply of skilled and experienced people willing to serve on Boards. Section Three of the draft Plan identifies the need for continuing improvements in the overall quality of disclosures by companies, but does not acknowledge the need to balance this with the need to encourage people to serve on Boards.

We note, under Supporting Outcome 3 (b), that 'some audit firms have argued that a perceived increase in regulation might adversely affect retention levels within audit firms which could adversely affect the supply of audit professionals in the future'. This brings to the fore the need for clarity and effective communication. This is specifically a problem in SMPs, and has not been adequately addressed.

5. Are there any other outcomes in our Strategic Framework where you believe there are significant concerns or serious shortcomings in the downside scenario which we have not identified? Please explain the risks which have led you to believe this.

At top of page 12 in the main document says that 'The supporting outcomes for which we assess there to be significant concerns or serious shortcomings for either the present or downside scenarios are shown below, together with the main risks which have led us to this view.' There is an inconsistency in the document between what are identified as major risks in section three of the main document and what are identified in the more detailed analysis in the supplementary information.

For example outcome One (c) has significant concerns attached to the downside scenario for all three components in the supplementary information but only One (c) (ii) is highlighted in the main report. It is not clear from the analysis why the FRC would see this as a more major risk than other two.

The first page of Section Three highlights concerns relating to recent credit market conditions, including the adequacy of disclosures relating to financing arrangements. These concerns have an impact on the risks identified under Strategic Outcome Two and the FRC 's activities in the area of corporate reporting. However, it is not clear that these concerns have been drawn out in sections Three and Four of the consultation.

Outcome Six (b) 'The FRC is recognised in the UK and globally as independent, credible, authoritative and influential' - Given the current climate, with predictions of a major corporate crash and the likely consequential criticism of the auditing community and its regulators, it is surprising that this risk (or that of another major failure in a high profile disciplinary action) are not cited as possible risks challenging this outcome in a Downside scenario. This is particularly the case given the statement on page 7 of the draft Plan that 'no system of regulation can ever eliminate the possibility of corporate reporting or governance failures.'

Section Four - Proposed major activities and projects

6. Do you have any comments on the scope and relevance of the proposed major activities and projects included in the draft Plan for 2008/09?

As noted under 2 above, the FRC should endeavour to ensure that the Plan is not perceived as using the assessments as a means of self-justification. Many of the projects and activities identified are already in progress.

The professionalism of accountants and actuaries has been considered in respect of public interest cases, but without acknowledging that the professionalism of accountants, for example, in small firms may be of local public interest, and to a large extent, the reputation of accountants generally is generated by such firms within the local business community. Therefore, under outcome Five, Section Four of the document should note specific FRC projects and activities that help to maintain the professionalism of accountants and actuaries, for example concerning how accountants support the needs of small and medium sized companies and their stakeholders, and information to be included in audit reports.

7. Do you have any comments on the more detailed list of activities and projects set out in the document Draft Plan 2008/09: Supplementary Information which we have published on our website?

Due to the manner in which the draft Plan is explained using two separate documents, the major activities and projects listed in section Four of the draft Plan are not clearly linked to the risks set out in section Three. It appears that not all of the activities and projects identified in the Supplementary Information are included in section Four.

In the supplementary information, component (ii) of Supporting Outcome Two (b) includes the assessment that 'with market encouragement, and provided that suitable guidance is maintained ...' the outcome will continue to be largely achieved. However, the issue of such guidance has not been included amongst the activities noted.

8. Are there any additional activities or projects which should be included in the Plan for 2008/09 or future years?

Generally, we feel that the plan does not adequately address:

SMEs,
non-financial reporting (e.g. sustainability),
European concerns over IASB, or
FRC 's own intentions regarding IFIAR.

Section Four - Assessment of residual risks

9. Do you agree with our assessment that there are significant concerns even in the upside scenario about the achievement of the outcome defined in the Strategic Framework in relation to an efficient market for audit services in the UK?

Yes. Inevitably, the risks will be managed only slowly, as implementation of the recommendations are monitored. Page 7 of the document does not provide comfort to the reader, as significant concerns will remain. This is another example of how the Plan should be structured so as to focus on the projects and activities, and provide detail concerning the management of the risks identified.

10. Do you have comments on the detailed assessments of the upside scenarios set out in our document Draft Plan 2008/09: Supplementary Information?

We have no comments in this respect.

11. Are there any other outcomes in our Strategic Framework where you believe there are significant concerns or serious shortcomings in relation to the upside scenario which we have not identified?