Big Four

Audit reform could cost businesses more than £430m a year

The analysis estimates that a further £169m a year could be added due to the costs of companies strengthening their internal fraud controls

The new audit reforms proposed by the government could cause businesses to face around £430m in extra costs, according to analysis carried out by the Financial Times.

It comes after the department of the Department for Business, Energy and Industrial Strategy (BEIS) published its proposal to shake up the audit industry. Split into three sections, the reforms will focus on improving the audit market, reinforcing investor and public confidence, and increasing director accountability.

Addressing the first point, companies will be required to use small “challenger” firms to conduct a large portion of their annual audit to increase competition.

The Big Four will also face a cap on market share, and a new regulator, the Audit, Reporting and Governance Authority (ARGA) will be established.

To regain confidence in business, new reporting obligations will be introduced, audits will be able to extend beyond financial results, and ARGA will be backed by new legislation.

Finally, directors of large businesses could be held accountable for serious failings, with a focus on increased transparency also targeted.

The FT said that as a result of the changes there could be a large cost to business which would come from extending the number of companies that fall within the proposed rules by an extra 2,000 business.

It estimates it would cost an extra £200m a year to businesses but this could also fall to £145m if a “narrower definition” is used.

The analysis adds that a further £169m a year could be added due to the costs of companies strengthening their internal fraud controls to come into line with the government’s requirements.

Finally, it said that the establishment of the new watchdog ARGA could cost a further £39m a year.

Despite the concerns put forward by the FT, the reform was welcomed by member sof the industry.

Hywel Ball, EY UK Chair, said that the move “marks a significant step towards a stronger UK corporate governance and audit ecosystem”.

“Overall, the consultation contains proposals that could ensure the UK economy remains internationally competitive and builds on its legacy of leading the world on accounting standards and governance. These reforms will help the UK remain an attractive place to do business. In the long-term, investors seek stable, well-regulated environments,” he said.

Sir Jon Thompson, CEO of the FRC, 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.”

He added: “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.”

 

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