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FRC position paper: ‘the profession should lean in’

Author: ICAEW Insights

Published: 13 Jul 2022

The FRC is taking an incremental approach to moving forward the audit and corporate governance reform agenda. It leaves the profession with plenty to do if momentum is to be maintained.

The profession must lean into the audit and corporate governance reform agenda and do what it can to facilitate it, ICAEW CEO Michael Izza urges, now that the Financial Reporting Council (FRC) has set out the timeline for reform. 

Its position paper outlines the introduction of the Audit, Reporting and Governance Authority (ARGA). It builds on elements of the UK government’s feedback statement relevant to the regulator. 

Initial reactions to that feedback statement, published in May, have been mixed. Many in the profession have expressed disappointment at its more limited programme and its extended and indeterminate timeline – but it also offers opportunities to improve things in critical ways, such as the audit and assurance policy.

“It will make things better, even if the timeline lacks the necessary urgency,” says Izza. “It is something of a missed opportunity, but it’s not a lost cause. The profession needs to back this agenda and make sure that it is fit for purpose.”

The importance of the audit and corporate governance reform agenda could be lost in the continuing political uncertainty as various candidates battle to be the next Prime Minister. ICAEW wants the profession to take a ‘help, harry, hope’ approach to pushing forward reforms: make the proposals work, keep pressure on the new government to ensure that timescales don’t drift and to try to push successive governments to go further. 

“It’s important that the wider audit reform agenda does not lose momentum and we urge the next prime minister and cabinet to ensure these changes progress, so Britain is the best place in the world to do business,” says Izza.

Making changes to existing codes, standards and guidance will be a complex process, he adds, but it’s vital that internal controls are tightened and corporate governance modernised. “We look forward to working with FRC to take this forward, providing our input into the various consultations that will now follow and further strengthening the audit profession.”

Taking a proactive approach to the implementation of the current programme of reforms will draw out the opportunities within it, Izza explains. However, that does not mean the plans should not be scrutinised and areas for further improvement identified. Initial reactions to the feedback statement – positive and critical – have helped the Department for Business, Energy and Industrial Strategy (BEIS) get ministerial traction in moving the agenda forward.

The profession already played a critical role in helping to shape the original outline of reforms presented in the White Paper on audit and corporate governance reform issued by BEIS last year. There is an appetite within the profession to embrace the current reforms and to go further in future.

“We continue to believe that a full package of legislation, covering the whole corporate ecosystem, would have been the best way to take these critical reforms forward and in time we hope some of the wider issues will be addressed,” says Izza.

The position paper

The FRC position paper focuses on five broad areas in furthering reform:

  1. Revisions and additions to the existing suite of codes, standards and guidance. 
  2. The development of new standards in shadow form, so firms can adopt them voluntarily ahead of legislation. This includes Minimum Standards for Audit Committees.
  3. Setting expectations for the markets to drive behavioural changes ahead of statutory powers. This follows the regulator’s approach to the operational separation of the audit practice in the largest UK audit firms.
  4. The development of guidance to address issues set out in the government response, meeting the bar set by Sir John Kingman; ARGA should be sparing in the guidance it issues and focused on the areas in which it has expertise.
  5. Setting expectations around future supervision and monitoring activities, which will flow from proposed revisions to existing codes, standards and guidance.

For example, it outlines changes to the UK Corporate Governance Code to include a strong framework for reporting on internal controls, board responsibilities for expanded sustainability and environmental, social and governance (ESG) reporting, and guidance on enhanced resilience statements and fraud reporting by directors. 

From an audit perspective, it sets out plans to make changes to the Ethical Standard, including three levels of public interest entities that incorporate changes to both the UK and international definitions.

Further consultations on various aspects of the position paper will be issued in the coming months, giving the profession more opportunities to influence the direction of travel as the reforms start to be implemented. There will also be a consultation over the summer about ARGA’s funding model. 

Much of these plans line up with the views of ICAEW: that the profession must get on with the business of implementing reforms and keep the agenda moving forward. 

“We are publishing this early view of our intentions to support the planning and engagement activities of our stakeholders, many of whom are keen to have greater certainty on when and how various aspects of reform will happen,” the FRC states in the paper. “We will use our annual three-Year Plan and other key publications to provide progress updates as needed, and ensure that wherever possible, our stakeholders have a reasonable period of time in which to prepare for future regulatory changes that may impact them.”

“The FRC deserves plaudits for publishing this position paper so soon after the government published its feedback statement,” says Izza. “It provides welcome clarity on how the regulator will pragmatically address some important issues that will not be included in legislation.”

Over the past four years, the profession’s actions in engaging with the process of audit and corporate governance reform have demonstrated that it wants to address the issues and to use the reforms as an opportunity to build on their strengths and improve the quality of audits and of financial reporting. It comes at a time when the economic landscape is increasingly complicated and changing rapidly. 

“The discussion that we’ve been having over the past four years since the collapse of Carillion has at least educated the public and media about the interdependence that the whole ecosystem has and requires in order to function,” says Izza. “Hopefully, when the next scandal comes along, questions will be asked about the directors and managers before the auditors.


Future of audit

Following the UK government's feedback statement on audit and corporate governance reform, we explore the various factors shaping the profession in 2022.

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