- The proposals respond to recommendations made by three independent reviews commissioned by the government in 2018.
- The objective of the reforms is to restore trust and confidence in audit and corporate governance.
- The Government is clear that directors, auditors, shareholders and the audit regulator must all play their part.
The UK government has launched a White Paper which sets out a package of measures aimed at improving the UK's audit, corporate reporting and corporate governance systems. The proposals are based on the findings of Sir John Kingman's Independent review of the Financial Reporting Council, the Competition and Market Authority's statutory audit market study and Sir Donald Brydon's independent review of the quality and effectiveness of audit.
The Government understands the serious challenges that businesses are facing because of the pandemic and does not want to add to those. Therefore, reforms will be introduced over an appropriate timetable and focus on the largest companies because that is where there is greatest public interest in ensuring that audit and corporate reporting are functioning effectively. It also recognises that a holistic approach to reform is necessary involving all stakeholders in the financial reporting supply chain. These are all sentiments shared by the final report for the parliamentary inquiry into the regulation of auditing in Australia.
Some of the proposals for each stakeholder group are outlined below.
In a similar vein to the final recommendations coming out in Australia, directors would have new reporting and attestation requirements covering internal controls. The tentative preferred option would require a directors' statement about the effectiveness of the internal controls, but (unlike the US's approach to internal controls which mandates external auditor attestation in most cases) leave the decision on whether the statement should be assured by an external auditor to the directors, audit committee and shareholders.
Audit, auditors and audit firms
Creation of a new, stand-alone audit profession, underpinned by a common purpose and principles – including a clear public interest focus – and with a reach across all forms of corporate reporting, not just the financial statements. UK-registered FTSE 350 companies would be required to use a smaller "challenger" firm to conduct a meaningful portion of their audit.
Companies would be required to set out their approach to audit through publication of an audit and assurance policy on which there would be an advisory shareholder vote. Shareholders would also have a formal opportunity to propose to the audit committee areas of emphasis to be considered within the auditor's annual audit plan.
The audit regulator
The new regulator would be given additional powers to; (i) impose an operational split between the audit and non-audit functions of certain firms, (ii) impose a cap on market share of FTSE 350 audits, and (iii) hold directors of large companies to account for breaches of their duties. It would also have responsibility for deciding which individuals and firms should be approved to audit public interest entities, the definition of which is also proposed to be expanded.
We will be considering the proposals in detail in due course. The closing date for comments on the consultation is 8 July.
Read the full report here.Read more