Introducing ARGA: the proposed new audit regulator

The UK government has long proposed reforms to the audit and corporate governance framework. 

Back in September 2020, Sir Tony Redmond’s Independent review into the oversight of local audit and the transparency of local authority financial reporting had found “serious concerns” regarding the state of the local audit market and regarding the efficiency of audit firms. 

This review also called for a broader effort to enhance corporate transparency and accountability following high-profile corporate collapses and audit failures. 

As a result, the review proposed the establishment of a new regulator to oversee the audit profession — a proposal welcomed by the Government with plans to introduce the Audit, Reporting and Governance Authority (ARGA) in the UK. 

What is ARGA?

Since 2021, ARGA has been proposed to replace the Financial Reporting Council (FRC) as the UK’s audit regulator. 

Accordingly, the new regulator is intended to have enhanced powers and responsibilities, including oversight of the largest audit firms, setting standards for corporate governance, and enforcing compliance with auditing and corporate reporting requirements.

The FRC’s CEO, Sir Jon Thompson said: “These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting.

“While we await Government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve and enhance the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA.”

What is the need for it?

In March 2021, the Government announced its plan to establish ARGA in a white paper titled ‘Restoring trust in audit and corporate governance’. Up to now, the functions within the existing local audit framework are currently delivered by the Financial Reporting Council, (FRC), the Institute of Chartered Accountants for England and Wales, (ICAEW), the National Audit Office, (NAO), Public Sector Audit Appointments Ltd (PSAA) and Smaller Authorities Audit Appointments Ltd (SAAA), alongside the Chartered Institute of Public Finance and Accountancy’s (CIPFA) code of practice on local authority accounting.

But each of these bodies, the Government argued, has been “hampered by both a coherent response to challenges arising and a nimble response to changing imperatives” due to each one having its own organisational objectives. 

The FRC currently regulates local audit and is delegated specific functions, including oversight of the regulation of auditors of local public bodies by Registered Supervisory Bodies, and the oversight and monitoring for audits of significant local public bodies. 

The Government has agreed that ARGA will continue to fulfil this role and, in addition, it will have broader responsibility for the local audit framework, by taking on statutory responsibility for the Code of Audit Practice and associated Auditor Guidance Notes that are currently prepared and issued by the National Audit Office (NAO). 

In addition, the new regulatory body has also been proposed to prevent corporate failures such as  the collapse of Carillion with £7bn of debt in 2018 — and for which its auditor KPMG was fined only at the end of 2023. 

Overview of the new ARGA objectives

According to the White Paper published in 2022, the regulatory principles ARGA will be subjected to are:

• Promoting innovation in statutory audit work, corporate reporting, corporate governance and actuarial work
• Promoting brevity, clarity and usefulness in corporate reporting
• Working closely with other regulators from the UK and internationally
• Anticipating emerging corporate governance, reporting, professional regulation, actuarial or audit risks by being forward-looking and acting proactively where possible

Following the regulatory principles, ARGA will have new powers to hold PIE directors to account if, in reporting, they do not fulfil their statutory duties as well as powers to monitor the audit market and audit firm resilience more effectively and powers to take action to act against regulatory non-compliance. 

In addition, the new regulator will be able to obtain information from companies, accountants, auditors, actuaries and relevant third parties and powers to set minimum requirements for audit committees in relation to the appointment and oversight of auditors. 

The White Paper also set out that ARGA will be required to produce an annual report that is submitted to the Secretary of State and laid before Parliament. The annual report will include reporting on the regulator’s broader regulatory activities, including performance of the regulator’s enforcement function, to enable greater parliamentary scrutiny of the regulator’s work and performance.

The Government stated: “In exercising both the new powers and powers that it will “inherit” from the FRC, ARGA will need to determine if those that it regulates have met their legal and other obligations, for example requirements set by a relevant recognised supervisory body. Where there has been a breach of legal duties or recognised and accepted standards, ARGA will have powers to take action and the types of actions that ARGA will be able to take will depend on the nature and seriousness of the breach in question.”

How will FRC support the transition?

So far the FRC has welcomed the Government’s response to the announcement and, in July 2022, has published a position paper highlighting how it will ensure a smooth transition. 

Firstly, the FRC has said it will revise the existing codes, standards and guidance to implement reforms. The focus of the revisions will be to provide “additional support” where reporting is weaker, as well as to reflect the wider responsibilities of the Board and Audit Committee for expanded Sustainability and ESG reporting. 

The council will also develop new standards to allow for voluntary adoption ahead of legislation, such as the Minimum Standards for Audit Committees, as well as setting high-level expectations around the future supervision and monitoring activities which will flow from the revisions to existing codes, standards and guidance. 

When will ARGA be implemented?

As the new audit regulator, ARGA will also have the responsibility to hold companies to account and will need statutory responsibilities and powers. In order to do so, the government has set out proposals for the set up of a dedicated local audit unit within ARGA to ensure that it will have sufficient focus and expertise when it becomes system leader for local audit. 

Yet, statutory responsibilities will require the further approval of Parliament and it is so far unclear how much time the process will take.

According to FRC’s latest 2023-26 draft 3-year plan, the planning assumption for ARGA’s start date has been pushed to April 2024.

The intention of the Government remains to create ARGA and equip it with its powers at the “earliest possible juncture”, since many of these factors represent work that ARGA will need to do. The timescale for this and for other legislative measures will depend on the availability of Parliamentary time and on its agreement to the proposals.