May 2021
Plans to reduce the dominance of the Big 4 accountancy firms and the creation of a new industry regulator came a step closer as the government unveiled a major overhaul of the UK’s audit regime.
The proposals, set out in a new white paper, are designed to improve regulatory standards after the high-profile corporate failures such as BHS and Thomas Cook.
On top of big changes in audit, company directors will face fines and bonus clawbacks if accounts are found to be misleading.
Minister for Corporate Responsibility Lord Callanan said: “Audit failure isn’t an abstract problem; it has real-life consequences. Thousands of jobs have been lost in the wake of collapses like Carillion, and many more lives impacted, while wider confidence in big business is undermined.”
He went on: “Auditors and rogue directors who have been asleep at the wheel must be held accountable. So, as part of our plans, we will look to ensure the new regulator is fully equipped to take action where serious lapses have occurred.”
If approved, large companies would be required to use a smaller ‘challenger’ firm to conduct a meaningful portion of their annual audit, watering down the supremacy of big-name auditors.
The Big 4 could also face a cap on their market share of FTSE 350 audits if competition in the sector does not improve.
A new regulator, the Audit, Reporting and Governance Authority (ARGA), which could oversee the largest unlisted companies as well as those on the stock market, will also have the power to impose an operational split between the audit and non-audit functions of accountancy firms.
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 UK government also wants to encourage audit and assurance professionals to work towards a new audit profession, rather than remain a subset of the accountancy profession.
When it comes to the audit itself, new reporting obligations would be introduced on both auditors and directors around detecting and preventing fraud, with boards required to set out what controls they have in place and auditors expected to look out for problems.
Audits will also be able to extend beyond a company’s financial results to look at their wider performance, including against key climate targets, to ensure investors and other interested parties are fully informed and can hold companies to account as the UK seeks to eliminate its contribution to climate change by 2050.
Many commentators were taken aback by the plans to make directors of the country’s biggest companies more accountable for what is perceived as negligence in their duties.
Under the UK’s Corporate Governance Code, companies could be expected to write into directors’ contracts that their bonuses will be repaid in the event of collapses or serious director failings up to two years after the pay award is made, clamping down on ‘rewards for failure’.
Directors would also need to publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging them to focus on the long-term success of the company and consider key issues like the impact of climate change.
To read the 232-page consultation white paper ‘Restoring Trust in audit and corporate governance’ go to https://tinyurl.com/bu9rekfe
