{"id":134836,"date":"2021-03-18T17:18:49","date_gmt":"2021-03-18T16:18:49","guid":{"rendered":"https:\/\/www.vuelio.com\/uk\/?p=134836"},"modified":"2021-03-18T19:27:10","modified_gmt":"2021-03-18T18:27:10","slug":"audit-sector-reforms-government-publishes-white-paper","status":"publish","type":"post","link":"https:\/\/www.vuelio.com\/uk\/blog\/audit-sector-reforms-government-publishes-white-paper\/","title":{"rendered":"Audit sector reforms: Government publishes white paper"},"content":{"rendered":"<p><strong>Today sees the <a href=\"https:\/\/www.gov.uk\/government\/news\/business-secretary-launches-major-overhaul-of-uks-audit-regime-in-wake-of-big-name-company-collapses\">release<\/a> of a wide-ranging package of reforms for the audit sector by the Government, in the form of a white paper called \u2018Restoring trust in audit and corporate governance\u2019.<\/strong><\/p>\n<p>Launching the document, Business, Energy and Industrial Strategy Secretary Kwasi Kwarteng <a href=\"https:\/\/www.gov.uk\/government\/news\/business-secretary-launches-major-overhaul-of-uks-audit-regime-in-wake-of-big-name-company-collapses\">said<\/a>: \u2018It\u2019s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain\u2019s audit regime needs to be modernised with a package of sensible, proportionate reforms\u2019 and \u2018restoring trust in our corporate governance regime and encouraging greater transparency\u2019 would \u2018provide investors with clarity and certainty, cement the UK\u2019s position as the best place in the world to do business, and protect jobs across the country\u2019.<\/p>\n<p><strong>How did we get here?<br \/>\n<\/strong>The audit industry has come under increasing scrutiny over the last few years, with cases such as those mentioned by Kwarteng drawing public and political attention to the sector\u2019s practices and its regulation.<\/p>\n<p>The <a href=\"https:\/\/publications.parliament.uk\/pa\/cm201719\/cmselect\/cmworpen\/769\/76902.htm\">joint report<\/a> on the Carillion collapse by the Commons Business, Energy &amp; Industrial Strategy and Work &amp; Pensions Committees criticised the \u2018Big Four\u2019 audit firms. It noted that KPMG was \u2018complacently signing off the directors\u2019 increasingly fantastical figures\u2019, Deloitte was \u2018either unable to identify effectively to the board the risks associated with their business practices, unwilling to do so, or too readily ignored them\u2019, EY provided \u2018six months of failed turnaround advice\u2019 and PwC had \u2018benefited regardless of the fate of the company\u2019, having advised Carillion and the Government prior to the collapse and served as its special managers subsequently. The Committees concluded that they had \u2018no confidence\u2019 in the sector\u2019s regulator, the Financial Reporting Council.<\/p>\n<p>These concerns have led to three reviews of the industry, whose findings today\u2019s white paper reacts to:<\/p>\n<ul>\n<li>In December 2018, Sir John Kingman\u2019s <a href=\"https:\/\/www.gov.uk\/government\/publications\/financial-reporting-council-review-2018\">Independent Review of the Financial Reporting Council<\/a> It described the FRC as \u2018an institution constructed in a different era \u2013 a rather ramshackle house, cobbled together with all sorts of extensions over time\u2019 and called for it to be replaced by a new Audit, Reporting and Governance Authority.<\/li>\n<li>In April 2019 the final report of the Competition and Markets Authority\u2019s <a href=\"https:\/\/www.gov.uk\/cma-cases\/statutory-audit-market-study\">statutory audit market study<\/a> proposed legislative change to improve competition in the sector in December 2018, including separating audit from consulting services and introducing a \u2018joint audit\u2019 system under which audits of FTSE350 companies would have to be conducted by two firms, one of which would be outside the Big Four.<\/li>\n<li>In December 2019, the final report of Sir Donald\u2019s Brydon\u2019s <a href=\"https:\/\/www.gov.uk\/government\/publications\/the-quality-and-effectiveness-of-audit-independent-review\">Independent Review into the Quality and Effectiveness of Audit<\/a> was published. Brydon called for \u2018a fundamental shift in definition and approach\u2019 and a \u2018change in mindset\u2019, noting that while \u2018audit is not broken\u2019, it \u2018has lost its way and all actors in the audit process bear some measure of responsibility\u2019. He stated that the central objective of his review was \u2018making audit more informative to its users\u2019.<\/li>\n<\/ul>\n<p><strong>What is proposed?<\/strong><\/p>\n<p>The 232-page document contains a wide range of detailed proposals, which stakeholders will be grappling with in the weeks to come. Key proposals include action to tackle the dominance of the \u2018Big Four\u2019 firms in the market. Large companies will be required to use a \u2018challenger\u2019 firm to conduct a meaningful portion of their annual audit and, if competition doesn\u2019t improve, there could be a cap on the Big Four\u2019s market share of FTSE350 audits.<\/p>\n<p>There will be a new regulator, the Audit, Reporting and Governance Authority (ARGA), replacing the Financial Reporting Council, with the power to impose an operational split between accountancy firms\u2019 audit and non-audit functions to reduce the risk of conflicts of interest. It will be backed by legislation, funded by a mandatory levy and would have stronger powers to enforce standards. Audit and assurance professionals will be encouraged to work towards a new audit profession, rather than being a subset of the accountant profession. The definition of \u2018Public Interest Entity\u2019 will be widened to include very large non-listed companies, which will need to meet more stringent requirements.<\/p>\n<p>Auditors and directors are to be given new reporting obligations on detecting and preventing fraud, and audit will be extended beyond companies\u2019 financial reports to consider wider performance, such as on climate targets.<\/p>\n<p>There are also a range of proposals to increase the accountability of directors of large companies, including fines and suspensions for the most serious failings and measures to reclaim directors\u2019 bonuses in the event of these failings or company collapses. Large companies will also be required to be more transparent about their finances, not paying out dividends or bonuses when they could be facing insolvency, and being required to publish annual \u2018resilience statements\u2019 setting out how they are mitigating short and long term risks, such as climate change.<\/p>\n<p><strong>What has the reaction been?<\/strong><\/p>\n<p>Given the scale of the Government\u2019s proposals, it\u2019s clear that a lot of bodies in the sector will be taking their time to arrive at a detailed assessment of their implications. Nevertheless, they seem to have been broadly welcomed. Maggie McGhee, executive director of ACCA, <a href=\"https:\/\/www.accaglobal.com\/gb\/en\/news\/2021\/march\/ACCA-audit-reform-White-Paper.html\">said<\/a> that the Government\u2019s proposals contain \u2018a lot to consider\u2019 but her organisation\u2019s initial response was \u2018to welcome the depth and breadth of what is being proposed\u2019. Michael Izza, ICAEW Chief Executive, <a href=\"https:\/\/www.icaew.com\/insights\/viewpoints-on-the-news\/2021\/mar-2021\/beis-proposes-measures-to-restore-trust-in-uk-corporate-reporting?utm_source=twitter_corp&amp;utm_medium=social&amp;utm_campaign=insights&amp;utm_content=1\">said<\/a> that \u2018modernising corporate governance is a vital part of sustaining public confidence\u2019 and urged the Government \u2018to get on with implementation as quickly as possible\u2019.<\/p>\n<p>Deloitte has urged a wide range of bodies to give their input into the consultation, with UK managing partner Stephen Griggs <a href=\"https:\/\/www2.deloitte.com\/uk\/en\/pages\/press-releases\/articles\/deloitte-comments-on-beis-consultation-on-audit-and-corporate-governance.html\">noting<\/a> that \u2018only widespread input from across the business community will ensure audit and the whole corporate governance regime evolves to better meet society\u2019s expectations\u2019, and claiming the white paper \u2018provides a significant opportunity to enhance the reputation of the UK as a leading capital market and strengthen its position in the global economy\u2019.<\/p>\n<p>This position was echoed by PwC, whose Chairman and Senior Partner Kevin Ellis <a href=\"https:\/\/www.pwc.co.uk\/press-room\/press-releases\/pwc-comments-on-beis-consultation-paper-on-audit-and-corporate-g.html\">said<\/a> reform could make \u2018the UK an even more attractive destination for foreign investment\u2019 and \u2018the views of a wide range of businesses, investors and other interested parties will be key\u2019. KMPG <a href=\"https:\/\/home.kpmg\/uk\/en\/home\/media\/press-releases\/2021\/03\/kpmg-comments-on-beis-white-paper-on-corporate-governance-and-audit-reform.html\">agreed<\/a> that the reforms would \u2018demonstrate we are a fantastic country to invest in\u2019 and welcomed the introduction of \u2018a resilience statement, including Environmental, Social and Governance disclosures\u2019.<\/p>\n<p>Labour\u2019s Shadow Business, Energy and Industrial Strategy Secretary Ed Miliband <a href=\"https:\/\/labour.org.uk\/press\/ed-miliband-comments-on-governments-audit-reform-consultation\/\">said<\/a> there were \u2018real questions\u2019 about the sufficiency of the measures. He said he welcomed proposals such as \u2018tougher penalties for individual company directors where there are serious failings\u2019 but regretted that some independent reform proposals had been watered down, including \u2018mandatory joint audits between the big four and challenger firms\u2019. He called for \u2018a structural split between the audit and non-audit parts of business practises\u2019 to remain an option.<\/p>\n<p><strong>What happens next?<\/strong><\/p>\n<p>The <a href=\"https:\/\/www.gov.uk\/government\/consultations\/restoring-trust-in-audit-and-corporate-governance-proposals-on-reforms\">consultation<\/a> on the proposals in the white paper is open until 8 July 2021. The Government says that responses to this will inform draft legislation to be laid before Parliament when time allows, while many measures not requiring legislation are being taken forward by the Financial Reporting Council. It notes that auditors and others have the scope \u2018to take action on their own initiative\u2019 in the meantime, such as on \u2018defining and developing a new audit profession\u2019.<\/p>\n<p>Kwarteng claims that an \u2018appropriate timetable\u2019 will be followed to implement the plans given \u2018the serious challenges that businesses are facing because of the pandemic\u2019. The Government says its overall approach will be to quickly bring into effect measures that don\u2019t \u2018directly impact on businesses\u2019 and to quickly commence \u2018measures with significant impacts on those regulated by the new regulator\u2019 (perhaps with phase in or transition periods), but to consider \u2018measures with significant impacts on wider business\u2019 for later commencement, a transition period or phasing in.<\/p>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Today sees the release of a wide-ranging package of reforms for the audit sector by the Government, in the form of a white paper called \u2018Restoring trust in audit and corporate governance\u2019. We explore what it means for the audit sector and industry at large. <\/p>\n","protected":false},"author":412,"featured_media":134838,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[7383,7271,7341],"tags":[],"_links":{"self":[{"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/posts\/134836"}],"collection":[{"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/users\/412"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/comments?post=134836"}],"version-history":[{"count":3,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/posts\/134836\/revisions"}],"predecessor-version":[{"id":134841,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/posts\/134836\/revisions\/134841"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/media\/134838"}],"wp:attachment":[{"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/media?parent=134836"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/categories?post=134836"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vuelio.com\/uk\/wp-json\/wp\/v2\/tags?post=134836"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}