The UK government's answer to the call for an audit market reform
10 May 2021
In answer to the call for an audit market reform, the UK government has recently released its white paper “Restoring trust in audit and corporate governances” following a string of corporate collapses, including the likes of Thomas Cook and BHS.
Since these failures, three independent reviews were launched: Sir John Kingman’s independent review of the Financial Reporting Council (FRC), Sir Donald Brydon’s independent review of the quality and effectiveness of audit, and The Competition and Market Authority’s statutory audit market study.
All reviews resulted in some serious questions being asked regarding the state of the UK’s audit market to which the government has now responded with an ambitious package of proposals aimed at modernising the UK's audit, corporate reporting, and UK corporate governance code.
Focusing on the UK’s largest companies, both public and private, the 232-page consultation document, produced by BEIS, hopes to ‘restore stakeholder and public trust in the way that the UK’s most significant corporate entities are run, helping companies to become stronger and better equipped to face future challenges.’
The white paper's most significant proposals for an audit market reform are as follows:
- A new regulator - The FRC regulator will be replaced by The Audit, Reporting and Governance Authority (ARGA). The new regulator will have the power to investigate and sanction breaches of corporate reporting and audit-related responsibilities by PIE directors, publishing any summary findings following a review to increase transparency.
- Audit scope – The white paper has called for a new obligation on auditors to take a broader range of information into account when making audit judgments, with a new central principle for auditors to reinforce good audit practice.
- Disclosure of distributable reserves - Under the government's proposals, individual companies or parent companies would disclose in their annual report the total amount of their distributable reserves.
- Dividends – Further director accountability for dividend decisions is proposed as directors will be required to make a formal statement about the legality and affordability of any proposed dividend.
- Internal controls – There will be new reporting requirements for both auditors and directors, they will now need to produce an explicit directors' statement regarding internal controls and risk management systems.
- Annual resilience statement - The introduction of an annual resilience statement is proposed. This will set out how directors are assessing a company's prospects and addressing challenges over the short, medium, and long-term, including risks posed by climate change. The government believes that the pandemic has increased investor appetite for more comprehensive reporting on how companies are preparing to mitigate different risks.
- Audit and assurance policy - Another reporting requirement proposed is the requirement for an audit and assurance policy. This policy will describe directors' approach in relation to internal and external assurances they have sought for the information they report to shareholders.
The white paper has a 16-week consultation period, closing on 8 July 2021. While the exact nature of the reforms remains unclear at this time, given their proposed sweeping nature, undoubtedly companies and directors should be keeping a watchful eye on developments.
That said, the publication of the white paper does now offer auditors, companies, and directors the opportunity to understand and plan for the potential reform of the audit market.
The CEO of the Chartered Institute of Internal Auditors, John Wood commented: ‘The Chartered IIA particularly welcomes plans for a new audit regulator funded by a mandatory levy, a measure we have long been calling on the government to implement. At the heart of effective reform must sit a regulator with teeth, with sufficient powers to do its job properly.’
Discover how our intuitive audit software solutions can help to support robust auditing processes and good corporate governance as the UK audit market reform proposals unfold. Plus, if you are an internal audit professional, download our latest white paper on audit reform in the UK to find out how the upcoming reform may impact you and your team.
Audit reform in the UK
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