Restoring trust in audit and corporate governance

  • By Mercia Group
  • 19 March 2021 16:21

The Department for Business, Energy and Industrial Society (BEIS) today launched its long-awaited consultation Restoring trust in audit and corporate governance: proposals on reforms.

The consultation, which will run for 16 weeks, sets out the government’s proposals including legislative reforms in response to three major independent reviews conducted over recent years –

  • the review of the Financial Reporting Council (FRC) led by Sir John Kingman;
  • the statutory audit services market study by the Competition and Markets Authority (CMA); and
  • the review into the quality and effectiveness of audit led by Sir Donald Brydon.

The main proposals

Let’s summarise the main proposals which are aimed at various stakeholder groups as follows:

Companies and their directors

New reporting obligations are proposed for directors covering internal controls, dividend and capital maintenance decisions, and resilience planning. The proposed obligations include a requirement to disclose distributable reserves, an estimate of distributable reserves across the group (in the case of a group company) and a requirement to state that any proposed dividend will not, in the directors’ reasonable expectation, threaten the solvency of the company over the next two years.

Public Interest Entities (PIEs) will be required to publish both an annual resilience statement (setting out how their directors are assessing the company’s prospects and addressing challenges to their business models), and an audit and assurance policy (describing the directors’ approach to seeking internal and external assurance of the information they report to shareholders).

Enhanced regulatory powers are also proposed to hold directors of large businesses which are of public importance to account for breaches of their duties in relation to corporate reporting and audit.

Auditors and audit firms

The proposals seek to introduce a new, stand-alone ‘corporate audit’ profession with a reach across all forms of corporate reporting (including sustainability reporting), not just the financial statements. They set out a set of new overarching principles for auditors to reinforce good practice, a duty for auditors to take a wider range of information into account in reaching audit judgements and new obligations in relation to the detection and prevention of material fraud.

New regulatory measures are also proposed to increase competition and reduce the potential for conflicts.

At the heart of these new measures is a ‘managed shared audit’ requirement for FTSE 350 group companies. An audit firm would be appointed to lead the group audit, for which it would still bear overall liability, but when tendering the statutory audits of entities within the group, companies would be required to appoint a challenger audit firm to conduct a meaningful proportion of the statutory audits. This ‘managed shared audit’ regime aims to enable challenger firms to invest their capacity and capabilities in order to grow and compete across the FTSE 350 audit market.

Proposals also include measures for operational separation between audit and non-audit practices for audit firms which carry out statutory audits of 15% or more of the FTSE 350 by reference to audit fees.

The Audit, Reporting and Governance Authority (ARGA)

A new regulator, ARGA, is proposed to replace the Financial Reporting Council (FRC).

ARGA’s powers will be much more extensive than its predecessor’s. It will, for example, have the power to impose an operational split between the audit and non-audit functions of accountancy firms. It will also have the power to order companies to redo their accounts, without having to go through the courts.

ARGA will also play a more proactive role in identifying and assessing serious issues relating to a company’s corporate reporting or audit. It will be funded by a new statutory levy (which replaces the existing voluntary levy).

 

How we can help

If you would like to learn more, please book onto one of our audit update courses, which can be found on our 2021 training programme.

You might also be interested in these articles…