Accountancy sector responds to ‘half-hearted’ UK audit reform announcement

The accountancy sector has responded to new proposals outlined by the government regarding the reformation of auditing in the UK. While the Association of Chartered Certified Accountants (ACCA) gave a “cautious” initial welcome to the BEIS announcement about the UK’s corporate reporting and audit regime, the ICAEW dubbed the plans “half-hearted”. The newly-announced reforms reportedly aim to bring “transparency and accountability” for businesses, investors, accountants and auditors. They include the establishment of a new corporate reporting and audit regulator, increasing accountability for big business and “addressing the dominance of the Big Four audit firms”. As part of the reforms, the government confirmed that the Financial Reporting Council will be replaced by the Audit, Reporting and Governance Authority (ARGA), which will have tougher enforcement powers and will be funded by a levy on industry. Meanwhile, directors at the biggest companies will face sanctions such as fines if they breach their legal duties to be open with auditors or lie about the state of their firm’s finances. The government also said it will act to address “rewards for failure” when it comes to director bonuses. In addition, large businesses will be required to provide more information to investors and the public about fraud prevention measures, risks and what metrics are independently checked. Meanwhile, FTSE350 companies will also have to conduct part of their audit using a smaller challenger firm, while ARGA will also have the power to force big audit firms to separate their audit and non-audit functions and to enforce a market cap “if the state of the market doesn’t improve”. Mike Suffield, director of Policy and Insights at ACCA, said: “The Government’s announcement talks rightly of the need to build trust in the UK’s corporate reporting and audit. This trust is essential, and the accountancy and audit professions have been waiting a long time for proposals to be clarified. “ACCA will need to work through the details of the Government’s proposals, but the main omission at this point looks to be the absence of any legislative requirements upon companies and their directors to report upon internal controls over financial reporting. We saw this option as an important element of a reform programme that should look across the corporate reporting ecosystem as a whole, and not just at the auditors.” He added: “We’ve been explicit in responses to various consultations over recent years that regulatory reform is vital and so we’re glad to see ARGA being given the teeth it needs to bite. Its ability to ban failing auditors from reviewing large companies’ accounts and to investigate and sanction directors of large companies for breaches of duties around corporate reporting and audit gives it the necessary power to tackle any future issues. “And as a professional body, we welcome the opportunity to continue to work with the regulator on their statutory powers to oversee our regulation of the accountancy profession which is core to our purpose.” ICAEW CEO Michael Izza said: “Taking these measures as a package with the draft audit reform bill outlined a few weeks ago, the government’s approach has a half-hearted and lopsided feel to it. Lessons from Carillion and other recent company failures have been ignored, with little emphasis now on tightening internal controls and modernising corporate governance.” Meanwhile, Jon Holt, CEO of KPMG in the UK, welcomed the reforms but said he hoped they would “go further”. He said: "The challenges we face in sustaining and developing the UK’s leading position as a place to do business are complex and need all of us to play our part – company boards, executive management, the regulator, auditors and investors. Giving ARGA powers to investigate and sanction directors will help to make UK business governance and oversight world-class. "However, the apparent decision not to include a UK version of Sarbanes-Oxley in primary legislation leaves corporate Britain with no clearly defined framework for internal controls, and risks a pick’n’mix approach to reporting and measurement. It will result in investors and stakeholders receiving inconsistent information across different companies unless ARGA provides clear guidance going forward.” He added: “We are committed to increasing choice in the audit market. There is work to do to make shared audits function well in practice, and we will play our part to find solutions to these challenges, including by offering to pilot managed shared audits. We look forward to seeing the draft Bill as soon as possible. It is important not to lose momentum, and we will continue to work with the government and regulator to progress these reforms.”