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An annual audit is a statutory requirement for all listed and large companies. The purpose of the audit is to provide assurance to shareholders that the financial statements give a true and fair view of the company. Good audit, though, doesn’t just protect shareholders, but also employees, pension holders, suppliers, customers and the wider community. It serves the public interest by underpinning transparency and integrity in business.

The issues

High-profile failures such as BHS (2016), Carillion (2018), Patisserie Valerie and Thomas Cook (both 2019) have drawn attention to alleged poor auditing practices. Key alleged problems include:

  • Lack of competition: the ‘Big Four’ accountancy firms dominate the market and they are arguably ‘too few to fail’. All FTSE 100 companies, almost all S&P 500 companies and a great majority of FTSE 250 companies are audited by the Big Four.
  • Conflicts of interest: auditors can be caught between the interests of the company’s management, their own interest, that of their firm and their duties as auditors. Management hold influence over the auditor because they can harm the auditor’s interests, such as by not appointing or reappointing an auditor; terminating or not awarding contracts to the other arms (e.g. consultancy) of the accountancy firm that the auditor works for; or making an audit more difficult and costly by being less cooperative.
  • Poor quality and inadequate purpose: too many audits are found to be wanting by the regulator (the Financial Reporting Council – FRC), and fail to meet wider expectations. PwC was fined £10m (reduced to £6.5m for early settlement) in relation to its audit of BHS, and the partner in charge of the audit received a 15-year ban from auditing. KPMG was fined £14.4 million for deficiencies in its auditing of Carillion and outsourcing firm Regenersis. The regulator, the Financing Reporting Council’s (FRC) list of enforcement sanctions imposed shows that fines have also recently been imposed against other big players too, including Deloitte (October 2022), EY (June 2021), Grant Thornton (November 2021) and BDO (June 2020).
  • Weak regulation and supervision: the regulator lacks resources, powers and independence. Some argue that the FRC is too close to those it regulates and imposes “Mickey Mouse fines”.
  • Lack of prudence in the accounts: many areas of accounting involve a degree of judgement, and accountants can reach different results with the same set of facts and numbers. At the same time, compliance with laws that try to ensure prudence (such as by restricting when dividends can be paid) can be inconsistent.

Reform proposals

There were several major reviews of how the audit industry works – and how it might be improved – in 2018 and 2019, each recommending significant reform (the Kingman Review, a Competition and Markets Authority market study, and the Brydon Review). After considering these, in March 2021 the Department for Business, Energy and Industrial Strategy published a White Paper setting out proposals to make wide-reaching changes to the roles and responsibilities of directors, shareholders, auditors and the audit regulator, in an attempt to drive up standards.

The reforms included increased accountability for directors, a new audit regulator, requiring a clearer operational separation of the audit and non-audit activities of firms, and mandatory shared audits for FTSE 350 companies between the Big Four and smaller competitors. A consultation on these proposals closed in July 2021.

The Financial Times said that the proposals were “broadly welcomed by audit executives and business groups”, though concerns have been raised by some industry participants, politicians and academics over the costs of the reforms on businesses, on whether they are likely to successfully deal with the problems in the audit industry, and on whether increased accountability for directors might hamper attempts to boost diversity in boardrooms.

Final proposals

The Government published its response to the consultation accompanying its White Paper on 31 May 2022. The consultation received over 600 responses which the Government said “helped fine-tune the package of measures” but “received a positive response, confirming our belief that changes are needed to rebuild trust in audit and corporate reporting”.

Some of the key reforms mentioned include:

  • the creation of a new statutory regulator (the Audit, Reporting and Governance Authority – ARGA) with new responsibilities and powers, including “overseeing the accounting and actuarial professions, a stronger role in auditor registration, and new powers to tackle breaches of company directors’ duties relating to corporate reporting and audit.”.
  • expanding “the scope of regulation to large private companies” – those with both 750+ employees and an annual turnover of £750m+.
  • inviting the current regulator (the Financial Reporting Council) to strengthen the UK Corporate Governance Code to provide for an explicit directors’ statement about the effectiveness of a company’s internal controls and the basis for that assessment, and to work with companies, investors and auditors to develop appropriate guidance (including on what should be treated as “realised” profits and losses for the purposes of determining distributable reserves).
  • changing reporting requirements to “introduce a new statutory Resilience Statement and a new statutory Audit and Assurance Policy” for companies within scope.
  • ensuring that ARGA can direct changes to company reports and accounts, rather than having to seek a court order, along with powers to publish summary findings following a review.
  • giving ARGA powers to investigate and sanction directors for breaches of corporate reporting and audit-related duties.
  • giving ARGA responsibility for registration of auditors within scope, and ask professional bodies to improve auditor qualifications, skills, and training.
  • a package of measures intended to increase choice, improve resilience and enhance professional scepticism: notably giving challenger audit firms the opportunity to audit a meaningful proportion of subsidiary audits conducted for FTSE 350 companies; giving ARGA the ability to operate a ‘market share cap’; and powers for ARGA to require ‘operational separation’ of the largest firms and to monitor the health of audit firms.
  • a new statutory regime for the oversight of accountancy professional bodies and powers to investigate and sanction accountants.

After publication of the consultation response, the Financial Times reported that the Government had “watered down plans for an overhaul of audit and boardroom rules in the UK, dropping a proposal to require directors to sign off on companies’ internal controls and scaling back an expansion of the number of companies falling under the most stringent requirements.” But a  position paper published by the Chartered Institute of Internal Auditors noted that “the government’s proposed approach and the key proposals arguably do still represent the biggest and most radical shake-up of the UK’s audit and corporate governance framework in years.”

Implementing the reforms

A number of stakeholders have urged the Government to be quicker in implementing its proposals for reform of the audit industry.

The May 2022 Queen’s Speech only included proposals to publish a “Draft Audit Reform Bill”. The Financial Times reported on criticism by accounting and industry groups on the Government’s decision to “to ditch a bill from its next legislative programme that would have implemented long-delayed reform of audit and corporate governance”.

In February 2023, responding to a parliamentary question from Green party peer Baroness Bennett on publication of the Draft Audit Reform Bill, Government Minister Lord Callanan said that “the reforms [to the audit industry] will be delivered by a variety of mechanisms. This includes changes already made by the regulator and by Ministerial Direction.” He did not commit to a specific date for publication of the draft Bill, noting only that “The Government is committed to legislating when Parliamentary time allows.”

Government Minister the Earl of Minto noted in May 2023 that the Government had not yet “set a date for publication of a draft Audit Reform Bill.”


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