The UK accounting regulator is facing a deepening governance crisis after ministers rejected the case for reappointing two existing directors to its board.

In August the non-executive directors Jenny Watson and Dame Julia Unwin will leave the Financial Reporting Council after the government rebuffed a recommendation by Keith Skeoch, the interim FRC chair, that they be retained, said people briefed on the situation.

Their departures have raised concerns within the regulator that its board will be “underweight” and short on “institutional memory”, added these people.

The FRC has been without a permanent chair since Simon Dingemans left in May last year after only eight months in the job to join private equity firm Carlyle. The search for his successor has yet to start formally after delays in Whitehall, said the people familiar with the situation.

In October Skeoch and another senior FRC board member, David Childs, are also due to leave the regulator, by which time it would be left with just four directors unless more are recruited.

The FRC announced last month that Hannah Nixon, former chief of the Payment Systems Regulator, and Ruwan Weerasekera, a former SoftBank executive, had joined its board.

But after Watson and Unwin leave, the FRC will be left with only one female board member. This is despite the FRC being a vocal advocate for increasing gender diversity among senior management in listed companies and accounting firms.

The regulator has also been seeking to improve its effectiveness following criticism during several accounting scandals. The government is preparing for the FRC to start the transition into becoming a new accounting watchdog, to be called the Audit, Reporting and Governance Authority.

“We’re very supportive of a strong Arga but the new regulator needs a strong and competent board,” said Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales, the industry professional body.

Unwin said she was “very disappointed and surprised” that the government had not extended her term on the FRC’s board.

Watson declined to comment.

Unwin, former chief executive of the Joseph Rowntree Foundation, and Watson, former chair of the Electoral Commission, have served as FRC non-executive directors since 2018. Their departures mean the FRC will lose its two board members with backgrounds outside the corporate and accounting worlds.

“This shocking transition of [board] membership of the FRC at a time when the government is supposedly promoting greater accountability to stakeholders within accounting is unacceptable,” said Richard Murphy, accounting professor at the University of Sheffield.

“The closed shop around a narrow investment community and the profession should come to an end.”

The FRC said it was sorry to see Watson and Unwin leave. “We are grateful for the significant contributions that Jenny and Julia made during their time on the board especially over the past year,” it added.

The business department said Sir John Kingman’s review of the FRC, commissioned by the government, had recommended that the regulator should have a “refreshed board” when it changes to become Arga and that it will launch a recruitment campaign “imminently”.