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Proposed audit reforms will not be "game-changing" and risk major lost opportunity, say Manchester accountants

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Published: 07 Jul 2023

Leaders of the accountancy profession in Greater Manchester have called on the Government to focus on professionalism and inject greater conceptual clarity into its proposals as it draws up plans to reform of the regulation of audit.

In a joint letter sent to the business minister Kevin Hollinrake, Rod Sellers OBE, president of ICAEW Manchester, and Chris Humphrey, professor of accounting at Alliance Manchester Business School (AMBS), said that while reform of the regulation of audit was necessary, plans for shared audits and the structural separation of audit would be unlikely to prove "game-changing", as had been claimed by the former minister responsible for audit reform, Lord Callanan.

The letter summarised the responses from delegates at an event jointly hosted by ICAEW Manchester and AMBS last autumn, which explored the future of the audit profession. That event was addressed by Mr Hollinrake's predecessor, Lord Callanan, who was at the time Parliamentary under secretary of state at the erstwhile Department for Business, Energy and Industrial Strategy.

Delegates, the letter pointed out, wanted the Government and the audit regulator to focus on professional innovation rather than simply adding increased layers of regulation. "The Financial Reporting Council’s claimed desire to be an 'improvement' regulator was not, according to delegates, being readily felt and experienced at the audit practice 'coalface'," Mr Sellers and Prof Humphrey told Mr Hollinrake.

"Doubts were expressed over both the nature and impact of the FRC inspection approach, including the way in which associated publicity sometimes inappropriately 'names and shames' individual auditors with resultant career-threatening consequences."

The letter pointed out that the Government's most recent White Paper on audit reform mentioned the word "regulator" more than 500 times but did not feature the term "professionalism" even once. One unhelpful consequence of this was, Mr Sellers and Prof Humphrey continued, "the encouragement of a 'play safe' culture in audit."

At a technical level, Mr Sellers and Mr Humphrey also pointed out that delegates had expressed dissatisfaction with the definition of public interest entities (PIEs), the auditors of which are subject to enhanced regulatory supervision. They called for "a more nuanced, risk-based assessment to be adopted so as to avoid several mid-sized listed companies (many based in the North West region) being inappropriately impacted by the new PIE regulations."

The letter concluded by calling for greater conceptual clarity from the Government and regulator. Mr Sellers and Mr Humphreys told Mr Hollinrake, "A prominent overarching emphasis in the discussions with delegates was that the Government's reform agenda needed a higher level of conceptual clarity and consistency.

"While the Government has stressed the importance of a holistic approach to reform, this was not seen to be sufficiently evident in the overall reform package, with the resulting risk that a major opportunity for conceptual innovation and advancement in audit and the auditing profession will be lost."