As the government consults on the Kingman review recommendations, Michelle Cardwell of the Audit & Assurance Faculty outlines seven recommendations that focus on corporate reporting.
Following a series of high-profile corporate failures, several inquiries into the UK audit market were launched last year, including Sir John Kingman’s independent review of the Financial Reporting Council (FRC). Kingman’s report, published in December 2018, sets out 83 recommendations. Inter alia, Kingman called for replacing the FRC with a new, stronger regulator provisionally named the Audit, Reporting and Governance Authority (ARGA).
Kingman's recommendations
ARGA would have a duty to promote the interests of consumers of financial information. To achieve this, Kingman reviewed the FRC’s core functions and made a number of recommendations, including some aimed at improving corporate reporting and enhancing ARGA’s regulatory powers. These recommendations are outlined as follows:
- 1. Report to parliament on the usefulness of corporate reporting: The FRC will be taking forward this recommendation immediately. ARGA would promote concise and understandable corporate reporting, with the aim that reporting should be accurate, complete and not misleading to shareholders and other stakeholders.
- 2. Strengthening regulation of investor information outside of the annual report: Kingman asks that the government, together with the Financial Conduct Authority, consider whether such regulation should be enhanced and suggests a trial takes place
- 3. Pre-clearance procedure for new or complex issues: This charged-for service would assist companies in determining correct accounting treatments prior to publication of their accounts. The Department for Business, Energy & Industrial Strategy (BEIS) is considering a pilot programme by ARGA.
- 4. Extend corporate reporting reviews (CRRs) to the entire annual report: Current CRRs only cover the directors’ report, strategic report and annual accounts. The FRC intends to take this forward immediately (see next page), initially with the agreement of the companies being reviewed, but with supporting legislation to follow.
- 5. Publication of findings from CRRs: This would increase transparency on reporting shortcomings to investors, as well as aim to encourage preparers to improve the quality of their annual report. BEIS is consulting on this recommendation to avoid potential unintended consequences, such as confidentiality issues.
- 6. Power to direct changes to accounts: This would avoid the lengthy period of correcting and communicating material misstatements that arise due to court proceedings. BEIS has welcomed this recommendation and will pass necessary legislation shortly./li>
- 7. Skilled person review in certain circumstances: ARGA would have the power to require such a review when serious concerns are raised around the standard of a company’s corporate governance, corporate reporting or statutory audit. This independent expert would investigate specific issues and could potentially publish their findings. While BEIS agrees ARGA should have investigative powers, they are considering the potential market consequences of this further.
The response
The government has welcomed and endorsed Sir John’s findings and recommendations, calling them “well considered, far reaching and transformational”. BEIS plans to work with the FRC as it transitions to ARGA and at the time of going to press, is consulting on how to implement the recommendations.
ICAEW has called for bold intervention to restore confidence in audit and corporate reporting and welcomes the creation of ARGA as a strong and credible regulator. We have been studying Kingman’s recommendations in depth and gathering ICAEW member views, for our response to the BEIS consultation, which can be found at icaew.com/inquiryintoaudit
About the author
Michelle Cardwell is a technical manager in the Audit & Assurance Faculty.
