Sector Insights: Audit reform delay

Sector Insights: Audit reform delay

Industry experts give their views on the state of play when it comes to the UK’s upcoming overhaul of the audit sector

Sector Insights: Audit reform delay

Ever since calls were made by UK-listed firms to delay the long-awaited overhaul of the auditing industry back in June 2021, the silence from Department for Business Energy & Industrial Strategy (BEIS) and the Financial Reporting Council (FRC) has been deafening.

Calls for reform first emerged in 2018 following the collapse of construction firm Carillion, and a final package of reforms is expected imminently by a heavily divided market.

Perhaps most notably, plans for managed shared audit have been called into question. While challenger firms largely welcome the prospect of greater market share, the adverse impact this could have on audit quality has been highlighted by some key stakeholders.

Furthermore, suggestions that the initial reform package could be watered down have been met with considerable backlash. In particular, legislation to require directors to sign off on companies’ internal controls (loosely dubbed as the UK’s version of the US Sarbanes-Oxley Act) has been vehemently defended by investors.

With the prospect of watered-down audit reforms failing to improve audit quality drawing significant criticism, Accountancy Age consulted some key industry voices on the current state of play, and what the final reform package should look like.


Maggie McGhee, executive director strategy and governance, ACCA:

While consultations and reviews need time to collect evidence and decide on the way ahead, the timeline for audit reform has stagnated.

This has been attributed to Brexit and the pandemic, but the hiatus since the 2018 reviews (Brydon, Kingman and the Competition and Markets Authority) and July 2021’s BEIS consultation, has been too long a wait.

These reforms have to be looked at holistically. For example, the successful reform of audit is dependent on the implementation of reforms across the wider reporting and governance ecosystem. We also favour a phased implementation approach that retains a focus on improving audit quality.

The establishment of the new regulator, ARGA, must also be a priority. It’s of fundamental importance that ARGA is established as soon as possible and has the resources and capability to deliver the reforms.

Fraud and director responsibilities are also key. Sir Donald Brydon’s review emphasised the need for audit to be more informative and better serve the wider public interest. Survey results from our audit expectation gap research identified that the general public has high expectations from auditors when it comes to detecting and reporting fraud. What’s more, a substantial number of respondents said that the audit process can and should play an integral role in company safeguarding.

However, audit can ultimately only meet the needs of the user if reporting requirements also evolve to meet their needs. As reflected in Sir Donald’s recommendations, the responsibilities and accountability of directors and audit committees are critical.

A multidisciplinary profession, in our view, is a fundamental building block for a quality audit, both now and through the vision presented by Sir Donald Brydon.

Another priority to be addressed is the reputational standing of audit. An enhanced, high-quality audit can only be delivered if the profession is attractive to our next generation of auditor. Although this issue was referred to in Sir Donald’s report, ACCA believes that a greater emphasis needs to be placed on the attractiveness of the audit profession – and most notably, how Sir Donald’s recommendations will help to further enhance it. Audit firms of all sizes including the Big Four firms are increasingly struggling to retain their best talent in audit.

A successful outcome will need continuous careful analysis of the cost and benefits of implementing these proposals, alongside ensuring that the stakeholders affected, including the audit regulator, have the capacity to implement them effectively.

Andrew Walton, head of audit, Ernst & Young UK:

The factors driving a need for corporate governance and audit reform have been clear for some time, and the publication of the government’s consultation last year was a welcome step. It is vital that the Government maintains momentum behind the reforms.

Corporate governance reform is a three-legged stool – the role of auditors, the regulator and companies’ internal controls. Reform must address all three legs if it is to be truly effective.

When the consultation closed last year, we said that some proposals stand out as a priority: the introduction of a strengthened regulator and director attestation on the effectiveness of their internal controls over financial reporting. The experience in the US shows the type of accountability reforms included in the consultation can build long-term value, improve trust and resilience, and ultimately reduce the cost of capital. This value increase far outweighs the cost of additional regulation.

Overall, the reforms provide an opportunity for the UK to build a stronger business ecosystem, which will help the country remain an attractive and internationally competitive location for investment and entrepreneurship.

The audit profession is already taking action to enhance trust and confidence: last year, EY took a significant step towards the operational separation of our UK audit practice with the establishment of a new UK Audit Board and Remuneration Committee. We will continue to work with the government and other stakeholders on building trust and confidence in audit and corporate governance.

Stephen Griggs, UK managing partner, Deloitte:

Audit plays a critical role in the country’s business environment, and we fully support changes that enhance audit quality and improve choice in the audit sector.

We’re committed to playing our part in reform and while some changes require legislative or regulatory action, others can be progressed by the firms themselves. Therefore, alongside continuing to develop our audit product and launching our Audit Governance Board, in June 2021 we moved forward with the majority of operational separation, well ahead of the FRC’s deadline in 2024.

Our response to the BEIS consultation makes it clear that we support the majority of the White Paper’s proposals. We believe it provides a once in a generation opportunity to reform the corporate reporting system in the UK.

While there are details to be worked through, different players in the market – including auditors, regulators, directors and investors – must work together to ensure there is comprehensive reform of the corporate reporting system. This provides an opportunity to improve trust in business, build confidence in the UK as a leading capital market and strengthen its position in the global economy. It’s important we don’t lose momentum by delaying reform.

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