What do you need to know about audit reform in the UK?

August 11, 2021

In July, the UK Government published its preliminary response to a consultation on building trust in audit and corporate governance. What does this tell us about potential changes to audit and how can you ensure your organisation is prepared?

Consultations are how the Government tests possible policy changes with those likely to be affected by them. In this case, the proposals emerged in response to three independent reviews conducted in 2018. A white paper was published in March 2021 setting out the Government’s intended course of action, with a brief consultation running until early July.

The driver for these proposed changes was a series of high-profile corporate collapses which the Government argued revealed failures in (a) directors’ disclosures and (b) in the audit process. In particular, there was a perception that a lack of competition in the audit industry had reduced the rigour of audits.

The key proposals in the white paper, entitled Restoring trust in audit and corporate governance, are as follows.

More responsibility for company directors

Directors are responsible for running their companies and for signing off accounts and reports but, the white paper said: “The current framework… is inadequate in holding the directors… to account in the rare but serious case that they neglect their reporting responsibilities.”

To address this, the Government is proposing new reporting and attestation rules covering internal controls, dividend and capital

maintenance decisions and resilience planning.

For example, one proposal is that company directors should review the effectiveness of internal controls every year and issue a statement on that in their annual report. If they judge controls to be deficient, they should be disclosed, along with plans to remedy them.

Depending on consultation responses, and the shape of the final legislation, that statement may or may not need to be reviewed by an auditor.

Evolution of audit

The Government has also signalled its eagerness to modernise audit which, the white paper said “has not changed significantly for decades”.

In particular, it wants to see audit reports which are more “informative and forward looking” rather than simply providing a review of the accuracy of company accounts. Are directors conducting themselves appropriately? Are they taking appropriate steps to manage risk, tackle fraud, and so on?

It also wants to see more competition and fewer conflicts of interest as when, for example, the same firm delivering the audit is also bidding to provide other accountancy services to a client.

To achieve this, it proposes to create a new audit profession, distinct from accounting, with its own professional body. It also aims to stimulate competition with measures designed to encourage ‘challenger’ audit firms and to encourage practices to break apart their audit and accounting functions.

Involving shareholders

The Government is proposing that shareholders should be more involved in the audit process.

Though it is clear that shareholders don’t run companies – that is the job of directors – it does want them to have the opportunity to vote on the audit and assurance policy and to propose “areas of emphasis” to the auditors.

A stronger regulator

Finally, there are proposals to boost the authority and capability of the Audit, Reporting and Governance Authority (ARGA), the successor body to the Financial Reporting Council (FRC).

If the proposals are passed into law, there will be a new statutory levy to replace the existing voluntary levy.

It will also gain new powers, including the ability to hold company directors to account through investigation and enforcement.

Contact us for more information or to talk about how audit reform might affect you.