In the King’s Speech today, King Charles says (timestamped below) “bills will be brought forward to strengthen audit and corporate governance” in the UK. What this means is that the Financial Reporting Council (FRC) will be replaced with the Audit, Reporting and Governance Authority (ARGA). Audit reform was supposed to be included in the last King’s Speech but was noticeably absent, an omission deemed “very disappointing” by the Institute of Chartered Accountants in England and Wales (ICAEW) at that time.
Side note: Say what you will about the monarchy, you gotta love the pomp and showmanship of it all. Imagine Paul Sarbanes and Michael Oxley dressed up like this when they announced legislation named after them that would completely transform the audit industry.
Accountancy Age identified the four areas in which the Draft Audit Reform and Corporate Governance Bill would change things up in the name of audit quality and trust in UK capital markets:
- Establishing the Audit, Reporting and Governance Authority (ARGA) to replace the Financial Reporting Council, with expanded powers to investigate and sanction directors.
- Extending Public Interest Entity (PIE) status to large private companies, subjecting them to more rigorous audit requirements.
- Introducing a new regime to oversee the audit market, protect against conflicts of interest, and build resilience in the sector.
- Removing unnecessary rules on smaller PIEs to reduce regulatory burden.
Of the King’s audit shout-out the FRC said it “welcomes the Government’s announcement of draft legislation to modernize its regulatory toolkit.”
The FRC has transformed in recent years into a more robust and effective regulator. But despite this progress, there are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need. Without these changes we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.
Hmm this sounds vaguely familiar. Where have we heard this before…
This positive direction of travel recognizes our important role in supporting the UK’s reputation for good corporate governance, financial reporting, and audit. Our work underpins domestic and international investor confidence, resulting in businesses being more readily able to access the capital they need to grow and create jobs and wealth in every community across the UK.
We will work with the Department of Business and Trade as it brings forward this draft legislation while continuing to use our existing powers to deliver good standards of corporate governance, financial reporting and audit and fulfilling our remit to support growth across the UK.”
City A.M. has some reactions from the big dogs:
Hywel Ball, EY UK Chair said: “EY has consistently advocated for a stronger regulator and enhanced director accountabilities,” noting “we are pleased to see audit and corporate governance reform return to the legislative agenda.”
Cath Burnet, head of audit, KPMG UK noted that “reform of the whole corporate ecosystem is important for driving trust and confidence in the financial reporting of UK businesses.”
Agreeing, Paul Stephenson, UK managing partner for audit and assurance at Deloitte, stated that “inclusion of audit and corporate governance reform” today “is encouraging for our industry and UK business as a whole, and must push ahead at pace.”
Ball also noted that the “UK’s attractiveness as an investment destination, international competitiveness and economic growth depend on the implementation of smart, considered regulation.”
“Initial proposals were drafted several years ago and will need to be updated to reflect the current UK market, so we look forward to seeing further details once they are released,” Ball added.
Most interesting of the reactions was Forvis Mazars audit and assurance head David Herbinet who seems a bit annoyed that Big 4 get all the business. “To achieve the Bill’s goals will require Managed Shared Audit in the FTSE350. This is the only way we will build audit market resilience,” he said. “After years of reform being on the agenda the dominant four firms still account for 98 per cent of audit fees in the FTSE350.”
Managed Shared Audit = joint auditing. We’ll get to that in a second.
“This cannot be allowed to go on,” he said. “Were one of them to leave the market for whatever reason many leading listed companies would likely be left at short notice without an auditor which is untenable and would place the government in an impossible position.” Managed shared audit would “allow challenger firms to build up their market position in a practical way over five to seven years for the benefit of all listed market stakeholders,” he added.
Forvis Mazars pitches the joint audit idea here:
In a joint audit, several independent auditors are appointed to conduct an audit of the annual or consolidated financial statements. This means the audited company engages two (in rare cases three or more) audit firms. The unique feature compared to an ordinary single audit is that joint auditors both jointly conduct the audit and jointly certify the audited financial statements. It is important to distinguish here that a joint audit is not a dual audit, where the entire audit is carried out twice.
What sounds like a little more work at first glance can actually offer added value for companies. A joint audit promotes both a strengthening of independence of both auditors through the “four-eyes” principle, and improved audit quality through two quality assurance systems. After all, four eyes see more than two. This creates security and trust between stakeholders and the public. Building trust is very important following recent, high-profile, and much-discussed accounting scandals. Companies also benefit from the different professional expertise of two audit firms that bring in different auditors. This is particularly true in cases where there are complex accounting issues, or with regards to expertise in certain business segments or geographical areas.
In a submission to the Business and Trade Committee Inquiry on Audit Reform in May, the then-Forvisless Mazars said more choice in the market is needed to increase competition and resilience, particularly in audits of Public Interest Entities (PIEs). They also suggested the proposed Audit, Reporting and Governance Authority (ARGA) “could more simply and clearly be renamed the UK Corporate Governance Authority.”
Come on bro, the government can’t do anything simply and clearly.
Anyway, we look forward to seeing how this one shakes out.
This sounds like another nothingburger.
Unless the B4 are broken up into the “dirty dozen” nothing will change. And perhaps, not even then.