Investors should be more involved in company audits, says UK watchdog

Financial Reporting Council consults on corporate reporting and audit

The Financial Reporting Council, the UK financial reporting watchdog, wants shareholders to have more say in choosing the firms which audit corporate accounts.

The suggestion is among a raft of ideas the FRC is putting forward for debate in a bid to improve corporate reporting in the wake of the financial crisis. The FRC argues annual reports have become too cluttered, reducing their value for investors.

“There should be greater investor involvement in the process by which auditors are appointed,” the FRC said.

“We recognise that although shareholders confirm auditor appointments, management is perceived to determine the appointment (or reappointment) and remuneration of auditors and that, therefore, auditor independence is compromised.

“There is a case for the independence of the decision to be reinforced by the Audit Committee seeking greater shareholder involvement.” The comments come in the new Effective Company Stewardship: Enhancing Corporate Reporting and Audit report

There are two options. Either company audit committees should be required to explain why theyappointed the auditor, or they could discuss the appointment “with a number of principal investors”- and then report on that consultation to shareholders generally.

Although the FRC says audit failures could not have prevented the collapse of the credit markets, “questions do have to be asked when a company falls shortly after the audit has been completed”.

The FRC is the body which oversees the new Stewardship Code, the first attempt to codify shareholder responsibility.

Another proposal is to set up a ‘financial reporting lab’ where new financial reporting models and concepts could be explored. The FRC is also planning to set up a market participants group to advise it on market developments and international initiatives. It would also like firms to make use of the XBRL reporting language for online annual reports.

The FRC is also looking to boost its own resources to help it deal with the increased workload. Its powers “need to be reviewed to reinforce its effectiveness and independence”. The deadline for responding to this latest consultation is March 31.