It was revealed today, as part of the King’s Speach, that the creation of the new audit watchdog has been put on hold. Instead, the government said it would move full steam ahead on reforming the Financial Reporting Council (FRC) into the Audit, Reporting and Governance Authority (ARGA).
In addition, the Audit Reform and Corporate Governance Draft Bill outlined additional powers, including extending Public Interest Entity (PIE) status to the largest private companies, ensuring the high-quality audits of those businesses and early warning of financial problems.
City figures have praised the moves.
Cath Burnet, head of audit, KPMG UK noted that “reform of the whole corporate ecosystem is important for driving trust and confidence in the financial reporting of UK businesses.”
Agreeing, Paul Stephenson, UK managing partner for audit and assurance at Deloitte, stated that “inclusion of audit and corporate governance reform” today “is encouraging for our industry and UK business as a whole, and must push ahead at pace.”
Andrew Moyser, head of Audit and Assurance at MHA, added the Draft Bill “is long overdue”, adding “given the importance of robust, intelligent audit services in helping UK business remain strong and compliant”.
Burnet noted that in the meantime, KPMG has “adopted the principles of operational separation as set out by the regulator, and we continue to invest in our audit business, ensuring we remain focused on delivering sustainable audit quality”.
While Andy Hammond, Head of Audit at PwC UK noted that audit firms have made a “significant amount of investment to enhance quality in recent years”.
He continued by stating “we will continue to work constructively with all parties on our shared goal of maintaining and strengthening corporate governance in the UK.”
The government has said the Draft Bill will set up a ‘regime to oversee the audit market, protect against conflicts of interest at audit firms, and build resilience so a quality audit is available to all companies that need it.
Commenting on this, David Herbinet, head of Audit at Forvis Mazars highlighted: “To achieve the Bill’s goals will require Managed Shared Audit in the FTSE350. This is the only way we will build audit market resilience.”
“After years of reform being on the agenda the dominant four firms still account for 98 per cent of audit fees in the FTSE350,” he explained.
“This cannot be allowed to go on,” he added. “Were one of them to leave the market for whatever reason many leading listed companies would likely be left at short notice without an auditor which is untenable and would place the government in an impossible position,” Herbinet continued.
He pointed out that “managed shared audit will allow challenger firms to build up their market position in a practical way over five to seven years for the benefit of all listed market stakeholders.”