Restoring Trust in Audit and Corporate Governance

As it’s Friday afternoon with not much happening, and I have completed my latest complaint about the time it’s taking to complete a SIPP platform transfer, I decided to have a look at the public consultation on “Restoring Trust in Audit and Corporate Governance” from the BEIS Department.

This is a quite horrendous consultation on the Government’s proposals to improve audit standards and director behaviour as foretold in the Kingman and Brydon reviews, with proposals for a new regulatory body (ARGA). That’s after a growing lack of confidence in the accounts of companies by investors after numerous failures of companies, and not just smaller ones. I call the consultation horrendous because it consists of over 100 questions, many of them technical in nature, which is why BEIS have given us until the 8th of July to respond presumably.

I won’t even attempt to cover all the questions and my views on them in this brief note. But I would encourage all those who invest in the stock market, or have an interest in improving standards in corporate reporting, to wade through the questions and respond to the on-line consultation (see link below). Otherwise I fear that only those with a professional interest as accountants or as directors of public companies will be responding. The result might be a biased view of what is needed to improve the quality of financial information provided to investors.

The general thrust of the proposals do make sense and it would be unfortunate if the proposals were watered down due to opposition from professional accounting bodies and company directors.

But there is one aspect worth commenting upon. Some parts of the proposals appear to believe that standards can be improved by imposing more bureaucracy on auditors and company directors. This might add substantial costs for companies in terms of higher audit fees and more management time consumed, with probably little practical benefit.

We need simple rules, but tougher enforcement.

The audit profession appears to be already seeking to water down some of the proposals according to a recent article in the FT which reported that accountants were seeking leniency on “high risk audits”. That’s where they take on auditing a company for the first time which may prove difficult, particularly where corporate governance is poor. This looks like yet another attempt by auditors to duck liability for not spotting problems which has been one of the key problems for many years.

BEIS Consultation: https://www.gov.uk/government/publications/restoring-trust-in-audit-and-corporate-governance

Roger Lawson (Twitter: https://twitter.com/RogerWLawson  )

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All Change in the Audit World

Readers don’t need to be told that the audit profession has come in for a lot of public criticism of late. Too many unexpected failures of companies and phantom profits being reported are the cause, apart from simple inability to detect fraud. There are three important announcements today that aim to tackle these issues.

The first is the Kingman Review of the Financial Reporting Council (FRC) published by the BEIS. Sir John Kingman basically says that the FRC is not fit for purpose – it should be scrapped and replaced by a new body called the Audit, Reporting and Governance Authority (ARGA). Not exactly a catchy title but the objective is certainly clear.

He wants the new body to have wider powers and a clearer remit. He also criticises the “consensual” approach the FRC takes to regulatory work, that it has an inappropriate culture and staff recruitment is often informal. In summary it’s a pretty damning report on the effectiveness of the FRC and how it currently operates.

BEIS have also announced a review of audit standards by Donald Brydon which will look at the quality and effectiveness of the audit market.

Plus the Competition and Markets Authority (CMA) have proposed new legislation that would separate auditor work from consultancy activities (the latter is 75% of their revenue at present) – what they call a “structural break-up”. They also suggest that audits of the biggest firms (i.e. FTSE-350) be done by 2 firms of which one must be outside the big four audit firms. This might reduce their stranglehold on the market. The CMA also proposes “more regulatory scrutiny” of audit firms to ensure that not just the cheapest audit firm is selected. Does this mean there will be a lot more bureaucracy involved? Perhaps so.

No doubt all these proposals will be subject to public consultation so they may get watered down. But surely these are moves in the right direction.

See https://www.gov.uk/government/news/independent-review-of-the-financial-reporting-council-frc-launches-report and https://www.gov.uk/government/news/cma-proposes-reforms-to-improve-competition-in-audit-sector for more information.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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