BEIS consultation on restoring trust in audit and corporate governance - part one
BEIS publishes its long-awaited consultation on restoring trust in audit and corporate governance.
BEIS has published its long-awaited consultation on restoring trust in audit and corporate governance. The consultation paper runs to 230 pages and the consultation will remain open until 8 July 2021. The key proposals on audit and related regulatory matters are set out below.
A strengthened regulator
The framework for establishing a strengthened regulator, the Audit, Reporting and Governance Authority (ARGA) is set out. It is proposed that ARGA, which will replace the Financial Reporting Council, will be established as a company limited by guarantee. Its general objective will be to protect and promote the interests of investors, other users of corporate reporting, and the wider public interest. It will also have two operational objectives, on quality and competition, and several regulatory principles set out in legislation.
ARGA will be governed by a simplified board with strengthened oversight, and non-executive members including the Chair will be public appointments. The regulator will be accountable to Parliament, with strategic direction from the Government. It will be funded by a statutory levy, paid for by market participants.
Additional changes to the regulator’s responsibilities
Further changes to the regulator’s responsibilities arising from recommendations in the FRC Review include:
- proposals for the regulator to have a new statutory role in the supervision of accountants and actuaries, replacing more informal arrangements; and
- proposals for a more pro-active role for the regulator in identifying and assessing serious issues relating to a company’s corporate reporting or audit by strengthening the regulator’s information gathering and investigatory powers. This includes the power to require an expert review, paid for by the company, to investigate issues in greater depth and explore the underlying causes.
The chapter also proposes to transfer the appointment of the Independent Supervisor of the Auditors General from BEIS to Parliament and sets out the Government’s consideration of recommendations from the independent reviews relating to whistleblowing, local audit and investor stewardship.
Enhanced powers for the regulator
The key measures proposed are:
- ARGA to have powers to direct changes to company reports and accounts, rather than having to seek a court order which is the position at the moment;
- increased transparency for the existing Corporate Reporting Review process, by enabling ARGA to publish summary findings following a review and, if necessary, full correspondence;
- the extension of the Corporate Reporting Review process to the whole of the annual report and accounts. This will ensure that ARGA can review areas that are not currently within the scope of its powers such as corporate governance statements and directors’ remuneration and audit committee reports as well as voluntary elements such as the CEO and chairman’s reports.
Audit purpose and scope
The Government’s proposals include:
- a new corporate auditing profession to operate independently of the professional accountancy bodies;
- new overarching principles for auditors, to reinforce good audit practice;
- a new duty on auditors to take a wider range of information into account in reaching audit judgements, in particular whether financial statements give a “true and fair view”; and
- new obligations on both auditors and directors relating to the detection and prevention of material fraud.
Audit committee oversight and engagement with shareholders
It is proposed to better safeguard the interests of shareholders and other users of accounts by giving the regulator new powers to set and enforce additional requirements for audit committees in the appointment and oversight of auditors. The proposed new measures are aimed at increasing audit quality. The Government envisages that they would apply to audit committees at FTSE
The Government is also consulting on powers to give the regulator an independent ability to appoint an auditor where more serious problems exist with a company’s audits. A number of new measures to encourage and facilitate more meaningful engagement between a company and its shareholders on matters affecting audit quality are also proposed. These include a formal mechanism by which shareholders of a quoted company can propose additional matters for emphasis within the scope of the company’s external audit, and proposals for better communication to shareholders following the resignation or dismissal of the auditor of a PIE.
Competition, choice and resilience in the audit market
The proposed reforms include:
- greater regulatory powers and duties intended to increase choice and competition in the FTSE 350 audit market, initially through a managed shared audit regime and, if needed, taking a reserve power for a managed market share cap;
- requiring operational separation between the audit and non-audit arms of certain firms, as determined by the new regulator. This will include separate governance, financial statements prepared on an arm’s length basis, and regulatory oversight of audit partner remuneration and audit practice governance; and
- statutory powers for the regulator to proactively monitor the resilience of the audit market and audit firms, including powers to require audit firms to address any viability concerns that are identified. The regulator will also have the power to take enforcement action to address anti-competitive practices and an abuse of dominant position within the statutory audit market.
It is envisaged that ARGA will be given rule-making powers to deliver the first two of these proposals to ensure that it has the ability to refine and adjust elements of detail over time and as the market adjusts.
The supervision of audit quality
- plans to make the new regulator responsible for approving statutory auditors of PIEs, rather than the professional bodies;
- proposals to improve transparency of the regulator’s Audit Quality Review reports on individual audits, while providing safeguards for sensitive information;
- the Government’s intention to provide the regulator with new powers to require a UK Group auditor to arrange access to overseas component auditors’ working papers, where considered appropriate; and
- a request for views on how the regulator might access information covered by an audited entity’s legal professional privilege that is needed for the regulator’s inspections and investigations of statutory audit.
The Government has also published an impact assessment, a summary of stakeholder responses to the Government’s initial consultation on the recommendations of CMA’s Market Study, and a summary of how each of the 150-plus recommendations of the Kingman, CMA and Brydon reviews is addressed either by the proposals contained in the consultation document or through action by the Financial Reporting Council.
Just prior to the publication of the BEIS consultation, ICAS published its vision exploring how various recommendations from the reviews might be combined to deliver a tapestry of reform which will recalibrate the corporate ecosystem of UK Public Interest Entity (PIEs). This paper also sets out our thoughts on how ARGA can help rebuild public trust by encouraging higher standards of corporate governance, corporate reporting and audit.