By Fiona Reddan
Stephen Haddrill, Chief Executive of the Financial Reporting Council, talks to Fiona Reddan about the challenge of Brexit, his commitment to high-quality regulation and the need to rethink the role of audit.
Brexit is in the air. Legislative proposals to trigger Article 50 and commence the UK’s departure from the European Union have been published, as Prime Minister Theresa May aims to meet her end-March deadline. But while a level of progress has been made since last June’s vote, uncertainty still reigns; how hard will a “hard Brexit” be? Will financial services firms retain some access to the single market? What level of tariffs will the EU exert on UK exports?
For Stephen Haddrill, Chief Executive of the Financial Reporting Council, it’s an interesting time. Once almost a “career” civil servant, having spent some 25 years in roles in the public sector, including a period as director general of the fair markets group at the Department of Trade & Industry, he moved to the private sector to join the Association of British Insurers as director general in 2005, and then the FRC in 2009. But while “interesting”, it’s also not without its challenges and Haddrill notes that certainty is particularly important for the accountancy profession.
“From a regulatory point of view, what we’re hearing from the accounting profession is that they want to see as much stability as possible,” he says, adding that he doesn’t foresee too many changes to the profession post the UK’s departure from the EU. “It’s about maintaining high-quality standards,” he says. “Competitive advantage in standards lies in having high-quality standards; we don’t see this as an opportunity for de-regulation.”
In this respect, he doesn’t expect too many changes to how the UK will ultimately interpret EU rules once it’s no longer obliged to enforce them, noting that EU rules will be “pretty much replicated in UK law”. More specifically, on the Audit Regulation and Directive (ARD) for example, he says it’s “right to maintain audit firm rotation” but notes that there are some really technical aspects of independence rules for auditors that “we’re not quite sure how they should be interpreted at the moment”.
And change could also be forthcoming if it means a shift downwards in standards. “If what’s done at international level is not of high quality in our view, we might want to make changes and would set a very high bar doing so,” he says.
Brexit also raises the thornier issue of the UK’s place at the decision table. Undoubtedly over the years the UK, and the FRC in particular, have been influential in driving the EU’s agenda on corporate reporting, audit policy and governance. But can this level of influence realistically continue when the UK is not a part of the process at EU level?
Haddrill believes so. “I think we would expect to be very influential in the standard-setting process outside of the EU. We are the second largest capital market in the world and would expect the voice coming from London to be listened to,” he says.
He does have some concerns, however, as to the quality of decision-making within the EU when the UK is no longer involved in the process, fearing that some EU countries are not as well-resourced as the UK when it comes to setting standards. “It does bother me,” he says.
Already, pre-Brexit jitters has seen a slew of UK-based lawyers register in Ireland in order to retain their access to the higher EU courts and tribunals. Could accountants follow suit? Haddrill is hopeful that this won’t be the case, and that a UK Chartered Accountant’s professional qualifications will be recognised elsewhere in the EU. “It will be one of our priorities,” he says, “We hope the Government takes proper notice of what this means both for the profession as a whole and individuals working in it.”
The auditing “brand”
Brexit of course is not the only challenge facing the profession. Post-financial crisis, it has been a tumultuous time. “We have to recognise that confidence was damaged by the financial crisis and has to be rebuilt… but that will take time,” he says.
Audit in particular has suffered, but Haddrill is keen to place this suspicion in a broader context. “Generally the public has become distrustful of experts… and this is a very expert profession,” he says.
Nonetheless, questions have been raised about the role of auditing – and what it can and should achieve.
“There is a conflict between what the statutory requirement for audit is and what the investor and general public wants,” he agrees, “Auditors are quite right to say that what the law requires is to provide an audit of financial statements. They’re there to report it as they find it. But it is a good moment now to consider whether the scope of the audit should be widened. There is a good case for it, and we need to consider it carefully.”
And leadership of professional services firms needs to be tuned into this, Haddrill says. After all, as he sees it, audit “defines the business, it defines the brand in many respects”.
“For a long time we’ve been trying to manage public expectations by explaining to the public what the law requires,” he says, adding that maybe now is the time that the profession needs to listen to the public. The other thing that is needed is a “high level of scepticism on the part of the auditor” Haddrill says, noting that in the run-up to the financial crisis “we didn’t see much of it”. Re-tendering and rotation helps in this regard, as set out in the ARD, which became effective in June 2016, and requires so-called public interest entities (PIEs) to put their audit out for tender every 10 years and change their auditor at least every 20.
“Auditors don’t see these contracts as a matter of right; they know they’ll have to pitch for new business,” says Haddrill. It’s a common sense approach.
“It seems to me that every company needs to assure investors and if they’re not testing the market from time to time, I’m not sure how you can provide that assurance,” he says.
He does, however, concede that rotation has not necessarily led to more competition. “It hasn’t led to more competition, but it has led to more frequent competition and that’s a good thing,” he says. “What we are seeing is that the mid-tier are picking up more consulting work with big businesses, and over time more as they become more familiar with those businesses. It might lead to something, it could be a slow burn,” he says.
But is this lack of plurality an issue? “I think it’s a concern; the market works with four (firms), but I think it would work better, particularly in FTSE 250 firms for example, with more competition in that area,” he says, adding that at one point, some sectors, such as insurance, had just two Big 4 firms pitching for business, although this has since improved.
The role of regulation
As a regulator, Haddrill has unsurprisingly fixed views on what the role of the regulator is – and isn’t. What it is, or should be, is principles-based, he says. “That’s not light touch. The language of light touch is dead as a dodo,” he says, adding that a principles-based approach is actually more difficult to achieve as regulators must use their judgment. “What we as a regulator need to do is exercise our own judgment about how an auditor has gone about the job”.
A tick-the-box approach on the other hand means a regulator is “not exercising scepticism, is not sufficiently curious, is not having to exercise judgment”.
What makes the job of the regulator easier is when the objectives of regulation are working in the same direction as competitive pressures in the market. But with the drive towards regulation, is there a danger that this will begin to impact adversely on the profession’s ability to attract and retain ‘the brightest and the best’? “I don’t believe that; I hear that quite often from the profession, but I don’t see any evidence that major firms are having any difficulty in recruiting people,” he says. “Whether people want to stay in it – that’s the challenge,” he says, noting that the generation leaving university now are looking at more varied careers than when he was in their position.
In an age of independent regulation, questions have also been asked of the role of professional bodies. Do they, after all, still matter? “They are hugely important. They are very close to their members and have, through their charters, a responsibility to promote high standards in their profession and high standards of ethics,” says Haddrill, noting that it’s very important that good standards and imparting a good understanding of ethics starts in training.
For Haddrill, corporate culture is at the heart of this new regulatory approach. “You can put all the rules in place that you can possibly imagine,” says Haddrill, arguing that it won’t work if the spirit in the organisation is not right.
But what about the UK’s “comply or explain” approach; is it time to move away from this to “comply or else”? Haddrill doesn’t think so, noting that when regulators have gone down the strictly legal route, they haven’t been able to put in place such “strong governance provisions as we have done”.
It’s not all regulation and corporate governance for Haddrill. A keen sailor, he has passed on his passion for the seas to his sons, and the family sail a Wayfarer dinghy on a lake near their home, as well as seeking out the warmer climes for holidays sailing the Mediterranean. One son is now a helicopter pilot in the army air corps, and the other works for Lloyds Insurance in Hong Kong. It’s not an unfamiliar place as the family spent some time there in the early 1990s when Haddrill worked for the Hong Kong government, and he hopes to return on a visit there shortly. But he has a clear focus – and it’s something which is shared by many in the current environment. “Over the next two years, it’s to come through Brexit with the professions still strong and with the UK and London capital markets strong and playing our part,” he says.
And when he at some point looks back on his time in the FRC, what does he hope to have achieved? “I think I do want to see the role of audit reviewed and extended so there is more confidence, and that auditors are actually looking at the things that matter to people,” he says.
Stephen Haddrill in conversation with Fiona Reddan, who writes for The Irish Times and is the author of Ireland’s IFSC: A Story of Global Financial Success.
This article was originally published in the February 2017 edition of Accountancy Ireland.