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BEIS white paper response: a lack of evidence that current regulatory arrangements are not working

Author: Professional Standards Department

Published: 25 Aug 2021

The ICAEW Regulatory Board (IRB) has submitted an extensive response to the Department for Business, Energy and Industrial Strategy’s (BEIS) White Paper on corporate governance and audit reform. In the response, which is the first time the board has replied in its own right to a government consultation, it debunks some myths about current oversight of the accountancy profession, and puts the case for continuing its role within the reformed regulatory infrastructure

The BEIS White Paper ‘Restoring trust in audit and corporate governance’ sets out wide-ranging proposals designed to strengthen the UK’s corporate governance and audit framework. In the aftermath of recent high profile scandals, such as the collapse of Carillion, the reforms are targeted at restoring public trust in how large companies are both governed and scrutinised.

The IRB’s decision to offer its own response, alongside that of ICAEW, was prompted by two main considerations. First, it felt well placed to address what it believes is the paper’s core failure to recognise the significant level of independent oversight exercised by the IRB and the independent regulatory and disciplinary committees it oversees over member conduct and discipline. And second it wanted to offer an autonomous view, separate from ICAEW as a membership body. It believed that a response from a board with a parity of lay and chartered accountant members, with a lay chair with a casting vote, and with an independent appointments committee, would carry greater weight.

Lack of recognition

The IRB’s response was developed by a subcommittee, which included the IRB’s Lay Chair, Michael Caplan QC, three other lay board members, and accountant board members with audit, insolvency and tax expertise. The subcommittee was assisted by Duncan Wiggetts, Chief Officer, Professional Standards Department (PSD) and other senior executives in the department.

While the IRB welcomes many of the proposals in the BEIS White Paper, it also raises a number of concerns, in particular, in the section relating to the creation of a new enhanced accountancy oversight role for ARGA. The IRB’s response points out the lack of evidence that the current regulatory arrangements are not working and the failure of both the earlier FRC Review by Sir John Kingman and the authors of the BEIS White Paper to request and review any information regarding the current arrangements before making recommendations for change. The response points out that the FRC Review’s recommendation for this new role for ARGA was based on what happened before 2010 and failed to take into account the significant governance changes implemented by all of the Recognised Supervisory Bodies (RSBs) since 2015 including, in the case of ICAEW, the creation of the IRB.

Mike Sufrin, Chair of the sub working group, points out that the role of the IRB is not mentioned at all in the BEIS White Paper. This effectively means, he explains, that some of the recommendations do not accurately reflect its current oversight of the profession. “We aren’t in a position of having to defend what we are doing; the BEIS White Paper just doesn’t recognise we are doing anything,” he says. “Consequently, it fails to take into account that the overriding objective of the IRB is to act in the public interest – exactly the same as is proposed for ARGA.

In its response, the IRB argues that some of the proposals “are based on misperceptions which are out of date”, for example the notion that the current regime for overseeing chartered accountants is “self-regulatory”. To counter these misperceptions, the board outlined its background and history, highlighting fundamental advances in regulatory oversight since it was created in 2015. “The IRB’s response seeks to explode the myth started by the FRC Review and continued in the BEIS White Paper that ICAEW operates a ‘self-regulatory regime’,” says Wiggetts. “All dictionary definitions of that term suggest that it is only appropriate where rules are created by chartered accountants, and that chartered accountants are responsible for checking compliance with those rules, without the intervention of external bodies. That might have been an appropriate description up to 2015, but it absolutely isn’t now.”

“Back in January 2015, we had disciplinary tribunals with a majority of chartered accountant members, and we had a majority of chartered accountants on the Investigation Committee, and all the other committees,” he explains. “Now, not only does the IRB have oversight over all ICAEW’s regulatory and disciplinary work, but all the committees that fall under it have at least lay parity – if not lay majority – of members, while still retaining the informed input from chartered accountant members.”

Recipe for success

In light of the robust independent structures already in place, the IRB believes the creation of an enhanced accountancy oversight role for the government’s proposed Audit, Reporting and Governance Authority (ARGA) “is not only unnecessary but that it will create significant overlap with the existing arrangements”, which will “inevitably lead to confusion among members, firms, regulators and the public”. The IRB response points out that not only will ARGA just add another layer of independent oversight, but it will duplicate the efforts of other oversight regulators who regularly inspect ICAEW’s work.

An alternative route would be for the government to build on the governance changes made by the RSBs since 2015, and the assurance gained from reviews by oversight regulators, by providing ARGA with the responsibility for setting independent governance rules to be maintained by the RSBs and letting them get on with their current regulatory arrangements as long as they remain in compliance. The IRB response points out that there is already a template for this in the Internal Governance Rules issued by the Legal Services Board to legal services regulators, including ICAEW. This continued reliance on the RSBs would also allow ARGA to concentrate on its core responsibilities of restoring trust in audit and corporate governance.

“Given ICAEW’s role as a RSB for statutory audit work,” the response states, “we already make an active contribution to restoring trust in audit and governance. Most importantly, we operate independently of, and unfettered by, the representative functions of ICAEW, as recognised in the reports from our oversight regulators on our governance arrangements.”

Turning the issue on its head, Wiggetts also challenges the assumption running throughout the FRC Review and the BEIS White Paper that regulation can only be carried out effectively by an independent regulator. “I cannot work out why most commentators consider it preferable to transfer responsibilities to independent regulators which are not subject to any oversight or quality assurance, and away from professional bodies whose work is subject every year to multiple internal and external reviews?”

Other key issues highlighted in the IRB’s response to the BEIS White Paper include:

  • Public Interest Entities (PIEs): the IRB supports the need to recast the PIE definition, but believes this should be focused on systemic risk, rather than size, with a new definition taking into account quantitative and qualitative information, and followed by classification into a tiered model based on risk.
  • Liability threshold: the IRB is concerned about the proposal to set a liability threshold for chartered accountants within the new statutory enforcement powers that is lower than, and inconsistent with, the current liability threshold for action in ICAEW’s own disciplinary scheme.
  • Unregulated accountants: the IRB believes the decision to exempt unregulated accountants from the new statutory enforcement powers could create even greater divergence between the degree of regulation for chartered accountants and the total lack of regulation for accountants operating outside the professional bodies. The government, it argues, is missing an opportunity to address this issue, and ensure everyone offering accountancy and tax services to the public is properly regulated.
  • Attracting talent: although the board welcomes the steps taken for operational separation of audit work from the rest of larger firms’ businesses, it is concerned that full structural separation could have the unintended effect of reducing audit quality in the longer term by deterring the brightest and best students who don’t want to specialise very early in their careers or may perceive audit-only firms as less attractive propositions.


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