Following the news that UK business secretary Kwasi Kwarteng has launched a major overhaul of the UK audit sector, The Accountant and International Accounting Bulletin brings you the latest reactions from the profession.
Following the release of the long-awaited whitepaper on audit reform today (18 March), Paul Winrow, partner at MHA MacIntyre Hudson, says the proposals should lead to a significant improvement in audit quality but there is a lack of clarity about how they will be applied to SMEs:
“The core of the government’s proposals are undoubtedly positive for business and the audit profession. A greater emphasis on the role of directors and company boards, including the potential for the new regulator to have powers over directors, could bring about real change when taken together with enhanced requirements on auditors. The introduction of internal controls and risk management reporting and assurance could also lead to a significant improvement in governance.
“A key question is how the government intend to balance the enhanced responsibilities of all those involved in the “financial reporting ecosystem”, from auditors to boards of directors, company management, standard setters and regulators, who all have an extremely important part to play in providing assurance to users of financial statements.
“We are also pleased to hear that the government is not proposing joint audits as a way to boost the presence of mid-tier and smaller auditors in the Public Interest Entity (PIE) market.* Managed shared audits are a better solution for the UK audit market but we still need to see more detail to determine the extent to which they will really help to increase competition in the audit market.
“However, a big concern is how the government’s proposals will affect all sectors of the economy. The focus of the reforms seem to be more skewed towards the larger PIE market, which is understandable. However, it not clear how the proposals will apply to SMEs, the lifeblood of the British economy. It is a worry that either the reforms will be unnecessarily bureaucratic for smaller companies, or that the SME sector will fall behind in a two-tier system by not adopting some of the beneficial changes in the reforms.
“At a time when many businesses are still reeling from the effects of Covid-19 and coming to terms with the changes brought about by Brexit, there is an important balance to be struck between ever-increasing regulations and the need for British businesses to remain competitive.”
*A Public Interest Entity (PIE) is defined by law for purposes of audit law and regulation but roughly speaking is a listed company.
ACCA: Primary objective must be to support high quality audit
ACCA executive director of governance Maggie McGhee said: “After much anticipation and speculation, we finally have clear proposals from BEIS about this important area of business reform in a post-Brexit world.
“The role of audit is essential to bring confidence in the UK as a capital market. Audit is a vital part of a connected jigsaw that creates and sustains this confidence and trust. Other key elements, in particular the crucial roles of company directors, audit committees, and the regulator, are covered in these comprehensive proposals.
“There’s a lot to consider here, including some important new proposals such as those for company directors and boards to be more accountable – an important step in recognising the responsibilities of all of those within the ecosystem of company conduct, reporting and oversight. We’ll be responding to this consultation in full – but our immediate reaction is to welcome the depth and breadth of what is being proposed.”
McGhee provided comment on the various proposals:
- Big Four: “Whilst we strongly support the objective of opening up the audit market to address the dominance of the ‘Big Four’, we will look carefully at the detail of the Government’s proposals. The primary objective of any reform of the audit market must be to support high audit quality, and we will consider the Government proposals in this context.”
- ARGA and operational split: “We have long welcomed the introduction of a new regulator, the Audit, Reporting and Governance Authority (ARGA). ARGA has already made progress on a voluntary basis in separating out audit practices from the broader firm across the ‘Big Four’. Building on this work within a statutory framework will need to be designed carefully to make sure that auditors retain the ability to access specialist expertise in an increasingly complex world, one of the key benefits of the current multi-disciplinary model.”
- Directors’ and boards’ responsibilities: “New levels of responsibility on directors and boards around detecting and preventing fraud are wide-ranging and will give ARGA extra powers well beyond what has been the norm. This is a big move, with proposals for directors of big firms to be ‘more accountable’. Whilst we are supportive in principle of extending accountability to company directors, detailed proposals should be proportionate and carefully thought through, with any potentially negative impact fully considered.”
- A new audit profession: “As we said when we responded to the Brydon review, greater clarity is needed on what’s planned for the ‘new audit profession’ – and the basis on which it will enhance the profession. The Government, ARGA, professional accountancy bodies and audit firms together have a critical role to play to ensure that the audit profession, however set up, remains attractive. It’s important to make sure that the valuable and transferable skills developed by people working in audit continue to be valued by wider business. As a professional body that trains auditors, our audit and assurance exams offered as part of the Master’s level ACCA Qualification deliver the technical skills and competencies needed and we will continue to evolve these as audit itself transforms. These are offered at two levels – compulsory for Audit and Assurance, and elective for Advance Audit and Assurance for those looking to specialise as auditors.”
FRC welcomes proposals
The UK’s Financial Reporting Council (FRC) has welcomed the proposals set out in the consultation. The FRC has been working for the past couple of years to implement changes to make it a more robust regulator before fully transitioning into the Audit, Reporting and Governance Authority (ARGA).
FRC CEO Jon Thompson said: “I welcome today’s publication as a significant milestone towards setting up a new, robust and independent regulator, which has the necessary powers to deliver its objectives, and on the ambitions set out in the three independent reviews.
“The FRC is already delivering on its commitment to transform, implementing reform across a variety of areas, where we are able to do so. This includes the operational separation of the Big Four audit practices, stronger and more timely enforcement and revisions to standards to drive higher quality work.
We will now work with colleagues in government and other regulators to ensure that the UK has an effective and clear regulatory framework, well understood by those we regulate and which supports high standards of audit, corporate reporting and corporate governance; helping to reinforce the United Kingdom’s position as a key global centre for investors and businesses.”
Chartered Institute of Internal Auditors CEO John Wood said:
“The Chartered IIA is pleased to see the Government finally making progress on its promise to deliver audit reform with the publication of today’s White Paper.
“We are encouraged by the Sarbanes-Oxley style proposals for a strengthened internal control framework for financial reporting, which will give more responsibility to company directors for the effectiveness of the financial controls. However, we believe there could be merit in extending the scope of this proposal to also cover the non-financial controls on a phased and incremental basis.
“The Chartered IIA particularly welcomes plans for a new audit regulator funded by a mandatory levy, a measure we have long been calling on the Government to implement. At the heart of effective reform must sit a regulator with teeth, with sufficient powers to do its job properly.
“However, it is disappointing that there is no detailed legislative timetable in the White Paper and we need to see a clear roadmap for reform without delay or else we risk further corporate collapses.
“These reforms need to be implemented with urgency to protect and enhance the UK’s enviable reputation for good corporate governance.”