Reporting accountants play a key role in ensuring investors’ confidence in the information provided by companies looking to secure finance, specifically at initial public offering (IPO). This role is particularly important in a shifting economic and regulatory landscape.

In support of the UK government’s growth agenda, ICAEW’s Corporate Finance Faculty has been looking at how the role of reporting accountants could better support capital markets.

In a new paper, aimed at engaging policymakers, regulators and capital market stakeholders on the adaptation that is needed, ICAEW outlines the key principles that such an evolution should apply and the pitfalls that must be avoided.

“Independent assurance of company information is a cornerstone of trust in our capital markets,” says Iain Wright, ICAEW’s Chief Policy and Communications Officer. “Reporting accountants play a fundamental role in maintaining investor confidence during IPOs and ensuring companies can meet their public obligations.

“Growth and economic stability are both built on foundations of investor confidence and changes must not erode this. Robust independent assurance and transparent reporting will remain a critical underpinning of this confidence and of the credibility of the UK markets overall.”

The paper, ‘The value of independent assurance in capital market transactions’, argues that the work of reporting accountants must be viewed holistically to maintain balance in the investment ecosystem and there needs to be commitment from all stakeholders to proportionate assurance processes.

David Petrie, Head of Corporate Finance at ICAEW, says: “Agreeing on a fit-for-purpose model that enables the UK’s equity capital markets to support listed companies will be a challenge and will require engagement across the ecosystem. We hope this paper will help to facilitate this discussion.”

Principles for the future

In the paper, the ICAEW Corporate Finance Faculty outlines four principles to which further evolution of the role of reporting accountants should adhere. Alongside taking a broader view of what reporting accountants offer, the paper argues for a risk-focused approach to due diligence and assurance that is tailored to the specific company and its circumstances.

The faculty also suggests that there must be more consistency between the information required at IPO and the ongoing reporting requirements or expectations post-IPO. For example, aligning the framework of assessing the company’s working capital position at IPO with that of going concern reporting as a public company.

The final principle is to increase the awareness and understanding of the extent of assurance that takes place at IPO, thereby providing greater insight to investors and clarity of expectations to potential IPO candidates.

Pitfalls to avoid

Alongside looking to what could change to support growth, the faculty acknowledges the temptation to make it easier for companies to list by reducing requirements including the extent of independent challenge.

The paper warns of the potential unintended consequences and the need for measures to address these. For example, it warns of companies not being ready at IPO to meet the more stringent reporting requirements on public companies, which it says can lead to a higher risk of restatements and profit warnings.

Similarly, it warns that if working capital statements on the capital structure at IPO are not appropriately independently challenged there is increased risk of companies having unexpected funding requirements post-IPO.

The faculty says that the public company auditor would need to consider what incremental work may be required upfront to factor these and other risks into the first year audit – potentially impacting on the willingness of new participants to enter the listed PIE audit market.

The paper also warns that if non-executive directors could no longer rely on assurance provided by reporting accountants, they may be less willing to take on roles.

The full paper offers more detail on these recommendations as well as a valuable analysis of the context within which reporting accountants operate. It includes: a summary of the changing UK capital markets landscape, insights into the capital markets ecosystems and the UK model today, as well as the impact of recent FCA guidance changes.

Wright says: “Now, more than ever, investors need reliable information to make informed decisions but as the capital markets landscape evolves so must the role of our members. We hope this paper will spark constructive discussions with our stakeholders so we can agree a proportionate approach.”