Sir Jon Thompson

In an interview with the Financial Times, Sir Jon admitted that the regulator had failed to do its job during a series of corporate scandals that have led to a drastic overhaul of audit and corporate governance in the UK.

Sir Jon  told the FT that he agreed with criticism of the regulator following company collapses including Carillion in 2018 and Patisserie Valerie in 2019.

He added that a new empowered regulator set to replace the FRC under much-delayed reforms, was not expected to be in place until 2023.

When asked whether the FRC was “asleep at the wheel” during corporate failures, he told the FT’s Board Director series: “The answer is yes. Let’s be straightforward about it.”

He said: “Were we complicit or in some way responsible for corporate failure? Well, it’s probably arguable that as a regulator we weren’t anywhere near as strong enough, we weren’t big enough, and we weren’t transparent enough to make a difference to the system.”

Thompson added that a review of the FRC by Sir John Kingman, which described it as a “ramshackle house” and recommended the watchdog be replaced by a stronger regulator, had been “generous” in its findings. 

However, he said that the regulator had taken some steps to improve its effectiveness.

He added that the government’s proposed reform of the audit sector would not have any significant effect on the dominance of the Big Four accounting firms — Deloitte, EY, KPMG and PwC — “in the short term”, adding they were “too big to fail”.

Ministers are seeking to break the dominance of the Big Four’s sauditing FTSE 350 companies by proposing “managed shared audits” involving smaller accounting firms. A Big Four firm would lead on the audit and retain overall liability, but a smaller rival could do a portion of the work.

However, Scottish Financial News reported earlier this week that plans to shake up the sector are facing a setback, as smaller firms consider snubbing reforms that would see them share FTSE 100 work with the Big Four companies.

Sir Jon Thompson said: “We cannot expose the smaller firms to the liability of auditing a FTSE 350 company. It’s too much for them to take on.”

But he added that shared audits would give smaller accounting firms experience in scrutinising the accounts of large companies. He added: “That’s the way to build up their capacity, but it’s a slow burn, it’s going to take a long time.”

The government has proposed giving the FRC powers to impose a cap on the Big Four’s share of the FTSE 350 audit market if competition in the industry does not improve, but Thompson said this was “not really an area where I want to go”. “I don’t think in the short term we’d be looking at using those powers.”