ICAS sets out the essential elements of reform in its response to BEIS
ICAS has responded to the BEIS consultation ‘Restoring trust in audit and corporate governance’.
From the outset of the calls for audit reform, ICAS has called for a holistic review of corporate governance, corporate reporting and audit (“the corporate ecosystem”). External audit does not operate in a vacuum. It forms part of the wider corporate governance and reporting framework that oversees large corporate entities. We all want a regulatory environment which not only protects the interests of investors and the wider public interest, but also ensures the United Kingdom provides global business with a regulatory environment that is proportionate and respected.
ICAS therefore welcomes the holistic approach adopted by BEIS in its consultation paper but made clear that it is imperative that the final changes which are taken forward, post consultation, recognise the need for holistic reform, and are delivered in a co-ordinated manner within a reasonable timeframe.
ICAS highlighted the following key themes to the government which have emerged over the consultation period:-
Proper consideration needs to be given to the international consequences of any changes that are introduced.
Focus on the key priority areas which will deliver much needed change in a proportionate and timely manner
The scale and magnitude of the proposed reform package may be difficult for the regulator, business and the profession to absorb in short succession. A well-focused package of reform at the outset will also increase the likelihood of success, and could help to reduce the associated costs and impact of the total package of reform.
Certain reforms will require further consultation
It is imperative that all proposals taken forward following the consultation process are subject to appropriate due process before being finalised, or further consultation if required.
The proposed changes will require considerable additional resources across all aspects of the corporate ecosystem – including ARGA.
ICAS also encouraged the government to reflect on the following key priorities:
Establishment of ARGA
ARGA has the ability to recalibrate the corporate ecosystem and rebuild public trust, by
encouraging higher standards of corporate governance, corporate reporting and audit. It can
help address the audit expectation gap. It can also help address the directors’ expectation
gap, in terms of the public’s understanding of what directors are responsible for, and hold
them accountable. As proposed in the BEIS consultation paper, this would require a substantive change of emphasis for its work programme and resources, compared with its predecessor, the FRC.
If audit quality is still not meeting the regulator’s expectations, yet no major audits opinions have needed to be restated, then perhaps there is a need for ARGA to articulate better what it is looking for. An improvement regulator should be able to articulate the level of standard expected. This will also be essential if the regulatory environment is to help support increasing choice in the FTSE 350 and wider PIE audit market.
Enhanced director accountability
There is a need for the roles and responsibilities of directors to be better understood, and for
greater accountability of directors. ICAS therefore welcome the government’s proposal to enhance requirements on internal controls over financial reporting which would appear to represent the introduction of a proportionate version of US SOX which would help place greater focus on director accountability.
Public interest entity definition
In order to ensure that there is a more level playing field between listed entities and private companies, the proposed extension of the scope of the definition of a PIE to cover certain large private companies appears sensible.
Enhanced transparency – corporate resilience
A Resilience Statement that incorporates and builds on the Going Concern and Viability
Statements will greatly improve transparency and seek to mitigate the risk of surprise failures. However, there is a need to recognise that there is a wide spectrum of companies who will now need to prepare a Resilience Statement, and there will be a need for flexibility to allow corporates to determine:
(i)the key matters to be addressed;
(ii)the most appropriate place in the statement to reflect them; and
Enhanced transparency – audit and assurance policy
The introduction of an audit and assurance policy will help to create greater transparency as to where a board of directors obtains the necessary assurance on key areas of the business and its reporting.
ICAS believes that there is merit in seeking to promote the standing and indeed attractiveness of the audit profession. ICAS notes that the government has proposed in its consultation to take forward Sir Donald Brydon’s recommendation to establish a new corporate auditing profession. ICAS published a paper ‘A roadmap to the Corporate Auditor profession’ in April 2021 that set out a vision as how this could be best achieved. The sequencing of actions envisaged in the ICAS paper is different in some respects to the proposals in the government’s consultation paper, but we consider 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.
Auditor liability reform
There is a need for the government to commission a review of the auditor liability regime to consider whether it remains fit for purpose.