James Barbour CA on the seven essential elements for corporate reform
From the outset of the calls for audit reform, ICAS has advocated a holistic review of corporate governance, reporting and audit (“the corporate ecosystem”).
We therefore see the recent consultation by the Department for Business, Energy and Industrial Strategy (BEIS), “Restoring trust in audit and corporate governance”, as a step in the right direction. We have, though, made clear that when all consultations are fully complete, the final changes must recognise the need for holistic reform, and should be delivered in a coordinated manner within a reasonable timeframe. As part of our response, we set out seven key priorities for the government to consider.
1. The establishment of Arga
The Audit, Reporting and Governance Authority (Arga) has the ability to recalibrate the corporate ecosystem and rebuild public trust by encouraging higher standards of corporate governance, reporting and audit. It can address both the audit expectation gap and that for directors too, improving public understanding of where directors’ responsibilities lie, and where they should be held accountable. As proposed in the BEIS consultation paper, this would require a substantial change of emphasis for Arga’s work programme and resources, compared with its predecessor, the Financial Reporting Council.
If audit quality is still not meeting the regulator’s expectations, yet no major audit opinions have had to be restated, then Arga needs to outline what it requires more clearly. An improved regulator should be able to articulate the standard expected. This will be essential if the regulatory environment is to support increasing choice in the FTSE 350 and wider public interest entity (PIE) audit market.
2. Enhanced director accountability
The roles and responsibilities of directors should be better understood, with directors being more accountable. We welcome the proposal to strengthen requirements of internal controls over financial reporting, a move towards the US system of greater director accountability.
3. PIE definition
To ensure a more level playing field between listed entities and private companies, we support the proposed widening of the definition of a PIE to cover certain large private companies.
4. Enhanced transparency – corporate resilience
A resilience statement, incorporating and building on the going concern and viability statements, will greatly improve transparency and mitigate the risk of surprise failures. But we must recognise there is a wide spectrum of companies which would need to prepare resilience statements. They need the new system to be flexible and allow corporates to determine the key matters to be addressed, the most appropriate place in the statement to reflect them, and the timeframe.
5. Enhanced transparency – audit and assurance policy
The introduction of an audit and assurance policy will help to improve transparency about where the board obtains the necessary assurance on key areas of the business and its reporting.
6. Corporate auditor
We believe the standing and attractiveness of the audit profession should be promoted. ICAS notes the government consultation proposes to take forward Sir Donald Brydon’s recommendation to establish a new corporate auditing profession. Our paper, “A roadmap to the corporate auditor profession”, published in April, set out our vision as to how this could best be achieved. The sequencing we envisage differs in some respects from the government’s proposals, but the end result would be the same: there would be a corporate auditing profession that produces high-quality audit and assurance of both financial and non-financial information.
7. Auditor liability reform
We believe the government should commission a review of the auditor liability regime to consider whether it remains fit for purpose.
The proposed changes will require considerable additional resources across all aspects of the corporate ecosystem – including Arga. Focusing on the key priority areas will deliver much-needed change in a proportionate and timely manner. A well-focused package of reform at the outset will also increase the likelihood of success, and could help to reduce its associated costs and mitigate any disruption.