The Auditing, Reporting and Governance Authority (ARGA) must have reliable funding in order to consistently deliver on its mandate, ICAEW stated in its response to the consultation on how ARGA should be funded.
The principles set out in the consultation document are a solid starting point, but inadequate to address all considerations. ICAEW is pushing for a framework based around four critical pillars:
- strong – through a funding model that supports stability, sustainability and independence;
- proportionate – by focusing on risk and minimising unnecessary costs;
- constructive – with funding based on efficient, targeted and well-developed plans; and
- accountable – as transparency and consultation secure strong stakeholder support.
The Financial Reporting Council’s (FRC) funding was a combination of statutory requirements, contractual arrangements and voluntary contributions, which according to Sir John Kingman in his independent review of the regulator, is “very unusual and clearly inappropriate”.
ICAEW strongly backs ARGA having the statutory powers to raise a broad-based levy, which should provide certainty and stability for the regulator and its various stakeholders, allowing it to carry out its activities constructively.
The consultation document bases its ARGA funding model on the principles of ‘fair, transparent and proportionate’. These are appropriate at a high level but require more detail to ensure that they have been applied effectively.
ICAEW outlined 10 actions in its response:
- A statutory levy should be introduced as soon as possible to provide ARGA and relevant market participants with resilience in funding and certainty in expectations, in order to establish a strong regulator.
- ARGA should make explicit reference to the risk-based approach in its guiding principle of proportionality.
- ARGA should establish mechanisms for regular and ongoing dialogue with levy-payers about efficiencies and networks and systems it can utilise.
- In order to provide an efficient regulatory service and be proportionate in a risk-based approach, ARGA should evaluate compliance systems of entities being regulated in determining the nature and volume of its activity.
- ARGA should establish a duty in its founding documents that it will assess and report on the economic impact of the activities it is proposing to undertake and then consult on this as part of the annual budget exercise.
- Through its public reporting and private dialogue with levy payers, ARGA should disclose its planned programmes and projects, report on how they are keeping to their critical paths and spending envelope and explain how they are making effective use of resources.
- Under the principle of proportionality ARGA should stipulate that the levy charged to each category licensee reflects the costs of provision to that category.
- Under the principle of transparency, and as envisaged by MPM, ARGA should disaggregate reporting of its costs into the separate activity areas assessed for levies. This information could be disclosed in its annual report, and at higher levels of disaggregation – shared with levy-payers.
- ARGA should open part of its board meetings to public observation. For example, the Public Company Accounting Oversight Board (PCAOB) broadcasts the board meetings that discuss its budget.
- To help get this input and enable points of difference to be raised ARGA should hold an Annual General Meeting. Ideally the cycle would be timed to allow for the AGM to be held during the period of the budget consultation.
“It is critical that ARGA is transparent and robust in its approach to its work and its funding model should reflect this,” says John Boulton, ICAEW’s Director, Policy. “Establishing a statutory levy and giving ARGA a broader base for its funding was a key element of Sir John Kingman’s vision and it’s good to see the FRC taking an early lead on this.”
In setting out the model, the FRC has adopted the Department for Business, Energy and Industrial Strategy’s (BEIS) three principles of fairness, proportionality and transparency and pledged that the funding model would comply with these. Boulton says: “It’s good to see the FRC take forward BEIS’ three principles, these make a lot of sense. To develop the model further and ensure ARGA maintains stable, sustainable funding having robust principles will be key.
“In our response, we’ve suggested that the principle of proportionality be developed to give a sense of efficiency and value for money in carrying out the regulator’s activities. We have also suggested a principle of accountability be added. ARGA will be accountable to parliament for its funding and it’s important it is a strong role model for transparency and good governance.”
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