FRC Chief Executive outlines wide ranging reforms
By Michelle Mullen, ICAS Executive Director of Standards
29 March 2021
Michelle Mullen reflects on her interview with Sir Jon Thompson, CEO of the Financial Reporting Council, and the insight he provided on the BEIS consultation on restoring trust in audit and corporate governance.
The long-awaited BEIS Consultation on restoring trust in audit and corporate governance was published on Thursday 18 March. The following week, ICAS hosted an ICAS Insights webinar with Sir Jon Thompson, CEO of the Financial Reporting Council. Joined by several hundred attendees, I was delighted to interview Sir Jon and to hear his early views on this important package of reform.
I thought I was familiar with the various recommendations of the earlier government reviews, but on seeing the recommendations laid out side by side I was struck by the strength of the messaging on corporate governance and reporting: government has presented a suite of proposals which acknowledge that directors run companies. Yes, there are proposals which look at the future of audit (including the new corporate auditor profession), and recommendations intended to enhance audit quality and promote competition in the audit market, but the overwhelming tone of this consultation is about the future corporate ecosystem.
ICAS will be reflecting on the proposals and preparing our consultation response... We will be engaging with Members and other stakeholders to help shape and inform our submission.
Make no mistake, if all of the proposals are taken forward the Audit, Reporting and Governance Authority (ARGA) will be a regulatory powerhouse with oversight and extensive powers over Public Interest Entity (PIE) companies and their auditors (and for that matter the chartered accountancy professional bodies in the UK). This is not a package of reform that can happen overnight, and Sir Jon was very candid that, even once enshrined in legislation, many of the proposals are likely to be phased into force over a period of three years, or more. Given this is a four-month consultation period, and legislative time will be at a premium this year, I asked Sir Jon what he saw as the priorities for the FRC as it awaits the outcome of the consultation and its legislative mandate, and likewise what ARGA might focus on during its first few years. It seems that the introduction of enhanced internal control requirements, the new Audit Committee regulatory framework and the new Resilience Statement are top of the regulator’s “To Do” list.
The introduction of an enhanced internal controls requirement for PIEs is one of the key reform recommendations of the review; a UK proportionate version of the US SOX regime. The consultation sets outs three options, with the government’s preferred option being the introduction of a Directors Statement on the effectiveness of the internal controls (over financial reporting) which will require to be published as part of the Annual Report. This is similar to the model which ICAS has previously outlined.
Sir Jon acknowledged that key recommendations relating to a new regulatory framework for audit committees and proposed Resilience Statement are likely to require further due process and future consultation. I read that as meaning that if the concept is deemed sound then the execution will still need careful consideration.
Of course, the foundation of all of the corporate governance and reporting recommendations is the definition of a Public Interest Entity, and the FRC and BEIS are aligned in their thinking that very (or the largest) large private companies should be classed as a PIE in future (with the preferred threshold being over 500 employees and turnover of more than £200m). ARGA is likely to monitor the impact of certain of the requirements on premium listed entities, e.g. internal controls, before making a decision as to whether they are extended to the rest of the PIE population, and in that respect the views of business will be an important voice in this consultation process.
Over the coming weeks, ICAS will be reflecting on the proposals and preparing our consultation response. Often the devil is in the detail and we will be engaging with Members and other stakeholders to help shape and inform our submission.