The Government finally released its white paper in March 2021 on how it sees the reform of the audit market following recent corporate failures including insolvencies of BHS in 2016 and of Carillion in 2018 and fraud in Patisserie Valerie in 2019.
The reforms aim to incorporate the Kingman report into the workings of the FRC after the Carillon collapse, the Bryden report into the quality of effectiveness of audit and the CMA report into competition in the audit marketplace.
The paper is wide ranging, covering aspects from:
– the type and size of large companies the legislation is due to cover
– directors accountability on internal controls and implications when it goes wrong
– introducing competition to bring “Challenger firms” in as part of the mandated managed shared audits
– splitting the Big 4’s audit arm with its non audit practice
– replacing the FRC with a new improved regulator ARGA
– a new professional body specifically for corporate auditors
Who’s caught by these changes?
These reforms are expected to impact public interest entities (PIEs), the definition of which is open to consultation and expected to be expanded to cover larger private groups, AIM listed companies and, potentially, public sector bodies.
The size criteria expected to be:
- companies with 2,000 employees or turnover of more than £200 million and a balance sheet of more than £2 billion (expected to impact an additional 1,960 entities according to the Government’s paper)
- companies with 500 employees and turnover of more than £500 million (expected to impact an additional 1,060 entities according to the Government’s paper)
The jury’s out on whether these reforms are far reaching enough and whether these will ultimately put an end to the corporate failures we’ve seen over the past few years so we expect to hear more once the consultation period is over.
What about “smaller” businesses?
These reforms will only impact the very largest and most complex of business in the UK. For 99% of businesses that fall below the size criteria, we are unlikely to see any major changes to audit regulations.
This makes sense – the audit regulations as they currently stand are pitched at a very high level for the less complex organisations and owner managed businesses. There is a cost-benefit analysis to be done relating to audits, and the right level of assurance at a reasonable cost to the organisation should be the objective. The majority of these types of audits are done to a satisfactory standard and arguably, the risks to the public interest of smaller company problems is very small.
There are improvements that need to be made in the auditing profession to regain the trust and integrity of the general public. It is inevitable that role of the auditor will continue to attract further scrutiny. No amount of regulation will stop every corporate failure in the future. It is abundantly clear that the role of the auditor to large and public interest businesses is very different to that for smaller ones.
Large corporate failures which impact on public trust need special attention. However, companies and the business world is far more complex now than it was historically, and audit exists to protect business stakeholders from the limited liability enjoyed by those who use companies. We have to acknowledge that the role of auditor is getting harder as the complexity and digitalisation of transactions increases.
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