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Restoring trust in audit and corporate governance: how could BEIS' White Paper affect practice?

Author: John Boulton

Published: 19 Apr 2021

Responding to the three public reviews that followed the 2018 failure of Carillion plc, the UK government department for Business, Energy and Industrial Strategy issued on 18 March proposals to reform audit, reporting and corporate governance. They have the potential to reshape our profession, audit and the wider corporate governance system. They could affect work practices for many years into the future, and although these are proposals for UK law, elements of the reforms may have wider influence internationally.

One thing is clear from the White Paper, following calls from ICAEW and others to target reform carefully and avoid disproportionate regulation of SMEs, most of the reform package is aimed squarely at the largest businesses.. But this is not static. One of the first questions BEIS asks is, now the UK is no longer bound by how EU law defines Public Interest Entities (PIEs), which entities are in ‘the public interest’? Practice members will no doubt have strong views where that boundary is drawn. 

For PIEs, a tougher new regulatory regime will apply, that includes:

  • a statement by directors, on the effectiveness of internal control – this may or may not be reviewed by the auditor, three options are given.
  • directors reporting on ‘the steps they have taken to prevent and detect material fraud’. Auditors will need to report on the work they have done to ensure this statement is ‘factually accurate’.
  • a new resilience statement to combine and extend existing disclosures in the going concern and viability statements.

To address the audit ‘expectation gap’, BEIS proposes introducing what they term ‘corporate audit’. The existing statutory audit of the financial statements will be supplemented with a requirement to have an ‘audit & assurance policy’. The Audit & Assurance Faculty have explored how this might work. Companies will agree the policy, subject to an advisory vote by shareholders., It will cover the scope of the wider ‘corporate audit’ which includes assurance on a potentially wide range of areas.

To deliver corporate audit, BEIS suggests that a distinct professional body is created for ‘corporate auditors’, bringing together financial statements auditors with those with the skills needed to provide audits of other areas identified by companies in their audit & assurance policies – such as sustainability. ICAEW will be looking carefully at how this might be delivered, building on the strengths of the existing profession.

BEIS will create a new regulator, the Audit, Reporting and Governance (ARGA) Authority to replace the Financial Reporting Council. It is proposed that ARGA has extensive powers over auditors as well as non-audit members of chartered bodies, PIE directors and audit committees. BEIS are seeking views on the balance of powers that ARGA needs to deliver the stronger corporate governance regime.

At the same time, BEIS is taking forward recommendations of the Competition and Markets Authority to increase competition and resilience in the market for FTSE 350 audits. Those measures include operational separation of the audit practices of the largest firms. BEIS will also introduce what they term ‘managed shared audit’, requiring all FTSE 350 audits to involve a shared auditor from a ‘challenger firm’, to complete a significant part of the audit. As an example, BEIS suggests that the shared auditor might cover the audit of a significant subsidiary. It suggests that as a bare minimum, 15% of the audit should be performed by the challenger auditor, and preferably nearer 30%. This is a particularly difficult area to address. These reforms are not taking place in isolation. The European Commission is expected to legislate shortly to extend reporting on sustainability issues by larger entities in the EU, including a requirement for limited assurance. Although BEIS is covering similar ground, it marks a clear divergence between UK and EU law. BEIS is consulting on introducing mandatory reporting for large and listed entities on compliance with Taskforce for Climate-Related Financial Disclosures guidelines. Moves are also underway to strengthen the enforcement of directors’ responsibilities under the Modern Slavery Act.

These developments are targeted at large companies, but the corporate social responsibility regime is a feature of the UK and international corporate landscape. Practices of all sizes may wish to keep abreast of these developments, for example to respond to clients wishing voluntarily to make these disclosures or to retain capacity to provide services to PIE clients.

At the same time ICAEW has been urging the International Audit & Assurance Standards Board (IAASB) to accelerate work on a proportionate auditing standard for ‘less complex’ entities. We are pleased to see that work moving ahead. Maintaining and developing a proportionate, efficient audit regime for SMEs needs to be front of mind as audit reform proceeds.

Get involved

Over the 16-week period allowed for the BEIS consultation, we will be holding many conversations with members and seeking insights into the areas where we can have most influence. Look out in communications for details on how to book. Views are being sought from ICAEW committees and district societies and can be sent directly to ICAEW’s Director of Technical Policy John Boulton john.boulton@icaew.com.

The consultation closes on 8 July 2021.