In his speech on 17 July 2024, the King confirmed that the Draft Audit Reform and Corporate Governance Bill would be given the go ahead. This announcement has been welcomed by many of the professional bodies which have been calling for audit reform for many years. The proposals are likely to have far-reaching implications for the audit and accountancy professions after being ‘overlooked’ in the last King’s Speech. I would imagine that many auditors also agree that audit reform is now in the critical stages.
The demise of Carillion sent shockwaves through the business world. A culmination of inappropriate accounting issues and a lack of challenge by auditors led to the ultimate demise of the business. But it is not just Carillion that has brought about the need for audit reform – other high-profile corporate collapses have led to the same question being asked: ‘is audit fit for purpose?’
In 2019, Sir Donald Brydon CBE published his report into the quality and effectiveness of audit and this report did not make for good reading. Brydon confirmed that audit is ‘not broken’ but had ‘lost its way’. The report made 64 recommendations including the establishment of a new regulator, the Audit Reporting and Governance Authority (ARGA), which will replace the Financial Reporting Council (FRC). ARGA will be given more statutory powers than is currently the case with the FRC and these powers will extend to holding directors, as opposed to just auditors and accountants, to account. This is expected to be welcomed throughout the accountancy and audit professions as well as by the general public at large.
The Draft Audit Reform and Corporate Governance Bill also proposes to:
- Extend Public Interest Entity (PIE) status to large private companies, hence large private companies will be subject to more rigorous audit requirements.
- Introduce a new regime to oversee the auditing profession, protect against conflicts of interest, and build resilience in the sector.
- Remove unnecessary regulatory burdens on smaller PIEs.
Restoring Trust
One of the main objectives of the current FRC and the government is to restore trust in the auditing profession. This must go much further than issuing new auditing standards, quality management standards, and revising existing ones (although this is expected to be part of the overall reform); it needs fundamental reform from the root upwards and this is what the Draft Audit Reform and Corporate Governance Bill aims to do.
The proposed legislation will give statutory rights to ARGA and will also set out clear expectations for companies, management, and auditors. Audit quality will be strengthened by the new regulator as audit firms will be held properly to account.
As well as restoring trust in the auditing profession, the proposals in the Draft Audit Reform and Corporate Governance Bill also aim to support long-term investment in UK companies and reduce the detrimental impact that accounting failures can have on businesses and communities.
Clearly, this is something that cannot be done overnight. However, there has been work done already over the last few years on the transition of the FRC to ARGA. Following the Kingman review into the FRC, a new board was put in place at the FRC and various recommendations from the Kingman review (which was done around the same time as the Brydon review) have also been implemented.
We should hopefully begin to see some traction going forwards where audit reform is concerned. After the previous King’s Speech failed to mention any aspects of audit reform, it was suggested that the move from the FRC to ARGA would not happen until 2027/28. However, given that this has now been given a ‘new lease of life’ we hope that the reforms will start to happen much sooner.
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