It is already clear that 2018 will be remembered as a pivotal year for our profession; one in which the crisis in public trust reached fever pitch, along with the need to instigate and embrace fundamental change.
As we enter the autumn, I want to update members on where we are, reinforce the magnitude of what is currently taking place and reassure everyone that ICAEW is rising to the challenge.
Media and public scrutiny intensified over the summer, for a number of reasons.
In May, the Business, Energy & Industrial Strategy (BEIS) and Work and Pensions select committees published their joint report into the collapse of Carillion. I’ve previously been clear that this represents a watershed moment for our profession, and of the urgent need to assess how we can close the audit expectation gap.
In June, the FRC’s Audit Quality Review reported an 'unacceptable' deterioration in standards among the 'Big Four'.
We’ve also witnessed the continuation of a steady stream of historical audit controversies. A number of publications, including the Times and the Financial Times, have been particularly active in highlighting the resulting challenges for the profession.
The issue at the heart of this scrutiny is the quality of audit, and indeed its continued utility and relevance in changing business and economic conditions.
As part of the Audit Quality Forum, we’re supporting an independent review of the purpose and scope of audit, in particular how it should evolve to address both the expectation gap and the impact of new technology. Recruitment is now underway of an individual of appropriate expertise and standing to serve as chair of the review. Over the summer, ICAEW has handled considerable media interest in the project.
Considerable attention has also been invested in the effectiveness of the current system of regulation. Back in April, the Secretary of State for BEIS, Greg Clark MP, set in motion a ‘root and branch’ review of the operation of the FRC, led by Sir John Kingman.
Along with many other representatives of the profession, ICAEW has engaged extensively with the Review, through meetings and briefings, and by attending a roundtable for Recognised Supervisory Bodies (RSBs) in July.
After extensive internal and external consultation, ICAEW also submitted formal written evidence to the Review in August. We took care to collect views from across the membership, including an excellent two-hour debate at Council Conference in July and two engagement events, in London and Manchester, specifically organised to hear from smaller firms.
We recommended that the FRC is retained and reformed, to make it the regulator of global standing the UK needs post-Brexit. We believe the FRC needs a tighter remit from government, defined boundaries, strengthened powers and a tireless commitment to drive improvement.
The Kingman Review will report to the Secretary of State and the FRC Board by the end of this year. BEIS will then develop policy proposals, which we expect to go to public consultation in early 2019.
Much of the scrutiny has led to a reassessment of the dominance of the 'Big Four' in the audit market.
During July and August, ICAEW worked with the largest nine firms to explore options for increasing competition and choice – a process which attracted significant press coverage.
Ideas discussed have now been briefed to the Competition and Markets Authority (CMA) and to BEIS, and include market share caps, technology and knowledge transfer, and shared and joint audits.
It is expected that the CMA Board will decide in September whether to initiate a formal market study or market investigation.
We’re also working hard to improve key influencers’ understanding of the issues; I’ve conducted a number of media briefings and we have a series of engagement events with the Treasury and BEIS select committees planned before the end of the year.
There is also another inquiry underway by the Labour Party, which touches on all three of these issues, being led by Professor Prem Sikka of the University of Sheffield, and which will likely report by the end of the year. ICAEW engaged with Professor Sikka early on, and subsequently submitted written evidence to his review in July.
A Time for Reflection
This summer has been one of reflection and representation, and the work and processes now underway will have major implications for the profession long into the future.
I am proud of the leading role ICAEW has played, and will continue to play. I believe we have been instrumental in developing a consensus within the profession on the need for change and how to deliver it. We will continue to work hard to convey that consensus - and our role at the heart of it - to policy-makers, other stakeholders and wider society.