Audit and trust in the UK – costs and implementation of government’s proposals need to be carefully analysed, says ACCA

The UK government’s proposals to reform audit involve radical changes for a wide variety of stakeholders - including audit firms and auditors, companies and directors and the regulator - says ACCA (the Association of Chartered Certified Accountants) in its official response to the consultation 'Restoring trust in audit and corporate governance: proposals on reforms'.

While commending the government for aiming to increase trust in audit and corporate governance and to improve the wider financial reporting ecosystem, the global body for professional accountants also warns that these reforms will need continuous careful analysis of the cost and benefits of implementation. The stakeholders affected, including the audit regulator, must have the capacity to implement them effectively.

As such, ACCA supports a phased implementation approach which retains a focus on improving audit quality.

Maggie McGhee, executive director – strategy and governance at ACCA says: ‘It’s imperative that the UK economy has efficient and effective capital markets so that there is confidence and trust in the corporate framework. That’s why these reforms are so vital. It is also important these reforms are globally consistent with other standards, and so the government needs to consider extraterritorial implications that some of the proposals may bring.’

ACCA’s response highlights six points which it believes are fundamental to achieving these reforms to increase trust in audit and corporate governance including:

1.    Separate audit profession and new professional body: ACCA and its members do not consider that the case has been made to separate auditing as a profession from its existing roots in the accountancy profession. ACCA believes that it is possible to further evolve the audit profession within existing structures. ACCA’s qualification and continual professional development (CPD) model provides audit as a specialist route for ACCA members wishing to hold the Recognised Professional Qualification (UK audit qualification).

Creating a separate and specialised professional body for Corporate Auditors could be perceived as career limiting and require a lengthy commitment to a separate specialised profession. A qualification limited to corporate audit may be less attractive to young talent and may also be a barrier to experienced candidates returning to an audit role later in their career. Both outcomes may result in a skills shortage, as those with valuable and relevant skills no longer wish to pursue a career in audit.

2.    Competition and choice: While shared audits in the FTSE 350 already happen in some instances, and these arrangements can work well, they can also lead to problems over communication, transparency and quality. Their use is uncommon, so it would be inappropriate to conclude that they can make a consistent improvement in audit quality – and they do not appear to have made any meaningful impact on choice in the audit market.

The FRC has acted decisively in support of audit quality and the public interest by publishing its principles for operational separation of audit practices. ACCA maintains its support for multi-disciplinary firms, drawing also from the findings of its joint research with IFAC and CA ANZ Audit quality in a multidisciplinary firm suggesting that multidisciplinary firms are better from an audit quality perspective.

3.    Resilience statement: ACCA supports the need for a resilience statement, believing that investors and other stakeholders reading and relying on the annual report and accounts will be very interested in the management’s view on the risks to the business and how their business model and strategy respond to these. The UK has an opportunity to influence global practice and standards in this space.

4.    Directors’ accountability: ACCA welcomes the government’s move to consider the entire “ecosystem” of stakeholder’s involved in ensuring that companies are well-run, and the capital markets function effectively. This means placing more explicit duties on directors.  Specifically, on internal control, ACCA considers that the public interest is best protected by a stronger and expanded role for external auditors in providing assurance that companies’ internal controls are effective (Option C). If the UK is to embrace this change then it should fully adopt the approach.

5.    Legislative powers: ACCA welcomes the proposals to provide the regulator with the necessary powers to investigate and sanction breaches of corporate reporting and audit-related responsibilities by PIE directors. However, this will add a further complexity to the existing arrangements for the oversight of director conduct, and hence the effectiveness of the collaboration across the various agencies will be pivotal to establishing arrangements that work well in practice.

6.    Funding of the new regulator: ACCA agrees with the proposal that the new regulator should be funded by a statutory levy and that the cost of its regulatory activities should be met by market participants and other beneficiaries.  The funding model should adhere to the “polluter pays” model, to avoid a disproportionate cost burden falling upon small audit firms and the SMEs that they predominantly service.

ACCA’s response to the government’s consultation is here: https://www.accaglobal.com/gb/en/technical-activities/technical-resources-search/2021/july/BEIS-consultation-response-restoring-trust-in-audit-corporate-governance.html

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"It’s imperative that the UK economy has efficient and effective capital markets so that there is confidence and trust in the corporate framework. That’s why these reforms are so vital. It is also important these reforms are globally consistent with other standards, and so the government needs to consider extraterritorial implications that some of the proposals may bring."

Maggie McGhee, executive director - strategy and governance - ACCA