The government’s consultation on audit and corporate governance reform proposes sweeping changes for company directors and auditors. Sir Jon Thompson, who will head up the Financial Reporting Council’s (FRC) successor body, the Audit, Reporting and Governance Authority (ARGA) has been the figurehead for discussion of the new regime.
Speaking to ICAEW Insights ahead of his keynote appearance at ICAEW’s Virtually Live conference on 16 June, Thompson underscored high levels of engagement in the consultation, along with a determination to ensure accountability and responsibility is assigned to the right people throughout the system.
How many people and organisations have you engaged with so far?
Too many to count! Through the FRC’s webinars and roundtables on the White Paper, we have reached hundreds of members of the profession, investors and stakeholders. I have spoken to thousands – I think the largest virtual crowd was over 5,000 – at events held by firms, a wide range of professional associations and organisations like ICAEW.
What’s the most surprising thing you’ve learned or been asked in this process? Have there been any alternatives posed that you think would work?
I haven’t been surprised by the questions or points made relating to the proposals. We have been talking about the outcomes for a while now, ever since the three independent reviews. What I have noticed in the questioning is focus on timing – that is, when will the proposals become law and how we would implement the proposed changes to get the best outcome. It is a broad consultation, and in some places, principles-based, and so people have tended to focus on one or two areas of particular relevance to them, eg managed shared audit or the definition of PIE.
Managed shared audit seems to be a contentious subject. What are the key concerns you’re hearing, and how do you think managed shared audit helps with competition in the audit market?
There is an agreement that something needs to be done to ensure the audit market is resilient and maintains choice. But there is a wide range of opinions on what the government should do. It would be fair to say that there has been much debate about Managed Shared Audit, and alternatives like Joint Audit and a market share cap. I do not consider there is a clear view from stakeholders about the way forward and we will need to carefully consider our advice to Ministers on the way forward on tackling the issues raised by the CMA in their 2019 report.
You have been very vocal about the need for NEDS to take more responsibility for a company’s control regime as well as its strategy – do you think the Sarbanes-Oxley (SOX) proposals will achieve this? What can we learn from the US experience?
One of the consistent themes throughout the consultation document is ensuring there is accountability and responsibility assigned to the right people. It is our strong view that driving personal accountability makes a significant difference. The implementation of something like SOX and an increased focus on internal controls will ensure that company directors take appropriate responsibility for the statements they make. The US example shows that SOX can work, but we need a solution that is right for the UK, reconciles to the US system and the Financial Conduct Authority’s Senior Managers regime.
These proposals will put the UK at the forefront of regulation of the sector in some areas. Do you think these proposed changes will maintain the UK’s reputation as a place to start and grow businesses, as well as continue to attract investors?
Yes, the UK is a high-standards economy, but the corporate failures of the last few years have dented confidence in the quality of corporate governance and reporting. As the Secretary of State has made clear, these proposals seek to restore trust and, in some areas, will put the UK at the forefront globally and there is a great deal of interest internationally in the Consultation Document. In some areas, though, the proposals catch us up with others, like in SOX. Being the first to introduce some of these proposals means that we further strengthen the UK’s reputation for high corporate governance standards, and others may well follow once we prove that these proposals work – I know several countries are watching our reform programme with interest.
With COP held in the UK this year, how are you balancing ESG reporting/demands on auditors with the need to generally raise the quality of audit?
This cannot be an ‘either or’ question. We need to do both. All corporate reporting is important and good quality reporting and audit serves a key purpose in informing stakeholders to make decisions as to where to place their money and do business. ESG reporting is of concern to all users of corporate information as the issues of climate change take on ever more significance to decision-makers, stakeholders and society as a whole. However, as the business landscape changes, there is always room for improvement and opportunities to simplify and streamline reporting obligations.
What next for good corporate governance and stewardship?
The government’s proposals are designed to further strengthen the UK’s reputation for high corporate governance standards. We need to focus on protecting the UK’s reputation as a great place to do business by ensuring better outcomes for companies’ stakeholders, which impact society more broadly. We will continue to use the Corporate Governance Code and the Stewardship Code to set and monitor high standards in the UK, in particular the Corporate Governance Code which is on a three-year update cycle.
Sir Jon Thompson will deliver the keynote address on Day 2 of ICAEW’s Virtually Live conference at 9.35 on 16 June 2021. To register for the session or more details click on the event page.
More on audit reform
Listen to Sir Jon Thompson's keynote speech on audit reform and governance from ICAEW's Virtually Live 2021.