At the start of September Justin Madders, who was at the time Parliamentary Under-Secretary of State at the Department of Business and Trade (DBT), wrote to the Chair of the Business and Trade Select Committee, Liam Byrne. The letter, published on 16 September, provided a fresh indication of the government’s direction of travel on audit and corporate governance reform.

Madders, at the time the Minister for Employment Rights, Competition and Markets, outlined that DBT’s plans might include:

• the replacement for the FRC being called the Corporate Reporting Authority (CRA);
• the definition of public interest entities (PIEs) to include entities with at least 1,000 employees and £1bn turnover; and 
• no longer pursuing proposals for managed shared audit or a market share cap. 

The plans are subject to consultation and aim, according to DBT, to ensure unnecessary administrative burdens are not placed on businesses, as the government seeks to boost UK economic growth. However, since the September reshuffle the proposals may be subject to change.

In the letter, Madders states: “The UK’s regulatory system for corporate reporting is good but has weaknesses that are holding back growth.” He notes room for improvement if the public interest is to be served in avoiding unexpected corporate failures.

ICAEW’s Chief Policy and Communication Officer, Iain Wright, says: “The letter offers welcome insight into the government’s current plans on the long-running issue of audit reform to support a better functioning PIE audit market. 

“However, whether the long-awaited replacement for the FRC is named ARGA or CRA is incidental. The key thing is that the new regulator is established with a proportionate remit focussed on audit and puts in place a new supervisory regime for sustainability assurance."

PIE definition 

The proposed extension of the UK PIE definition to bring in other large listed and unlisted entities, including companies and LLPs, with 1,000+ employees and a turnover of at least £1bn, is welcomed by ICAEW as higher than the long-mooted 750:750 threshold. 

“While we think 2,000 employees may have better reflected entities with a ‘public interest’, we understand that the proposed thresholds are straightforward to understand and apply,” says Alex Russell, ICAEW's Head of Audit and Assurance Strategy.

Reflecting on the information in the letter, the Centre for Public Interest Audit (CPIA) concluded that the new definition’s ultimate success will be measured: “... not just by how many companies are brought into scope, but by whether it delivers meaningful improvements in audit transparency, public trust, and corporate governance standards across UK capital markets." 

Holding directors to account

The letter also suggests a new regime of civil regulatory sanctions, helping to ensure that company directors are held to account for serious failures of their existing corporate reporting duties, such as ensuring that accounts are true and fair. 

The suggestion was welcomed by Wright: “ICAEW has long considered that ensuring a level playing field in accountability and enforcement among company directors should be a central tenet of avoiding future disorderly corporate failure.”

Audit market measures

Madders alluded to “measures to address poor functioning of the audit market, particularly for the largest listed companies”, while confirming that the previous government’s managed shared audit (MSA) and market share cap (MSC) proposals were no longer being pursued.

ICAEW and larger audit firms had offered cautious support for both those proposals, while acknowledging that the likely success, the timeframes involved, and the related costs were all highly uncertain, and that there had been little corporate support for the plans.

Timing and next steps

The next consultation on audit reform is set to be published “in the autumn” according to the letter. Alongside consulting on the three key elements outlined in the letter, Madders indicated it will also pose questions on: 

• whether the PIE definition should be further extended based on sector or type of business, and 
• whether, and how, to change rules that the majority of voting rights in an audit firm must be held by qualified auditors.

The second point in particular, is welcomed by ICAEW which has urged DBT and the FRC to consider audit firm ownership rules, given the increase in new ownership models in the UK audit market.

Madders indicated that the audit and corporate reform legislation will be set out through the King’s Speech in the normal way and suggested that scrutiny of the planned Bill would be “very valuable”.

“We look forward to sharing the expertise and insights of our members, and support the minister’s desire to get this legislation through parliament at the earliest opportunity,” says Russell. 

Member insights supporting audit reform

As the sector awaits movement on audit reform, ICAEW has been remained active in responding to consultations around the audit market, drawing on members’ expertise on:

• PIE auditor registration;
• FRC supervisory strategy; and
• SME audit market study, including follow up consultations on SME audits and Practice Note 26.

Looking to further ways for DBT to deliver on its aims to remove burdens to business that inhibit growth, ICAEW believes that more can be done to support the SME audit market.

“Alongside moving forwards with audit reform and supporting the PIE audit market, DBT should acknowledge that ISAs are simply not scalable for SMEs,” Wright argues. “DBT should encourage the FRC to consider how the IAASB’s standard for the audit of less complex entities could be made fit for purpose for use in the UK.”