Facing the findings

Today, two landmark reports on the audit market have been published.

Sir John Kingman has published the findings and recommendations of his ‘root and branch’ review of the FRC, commissioned back in April by the Secretary of State for Business, Energy and Industrial Strategy, Greg Clark MP.

The Competition and Markets Authority (CMA) has also published an update report, as part of its market study into competition and resilience in the audit sector.

ICAEW made comprehensive submissions to both Sir John Kingman and the CMA, and the final recommendations of these reviews will have far-reaching implications for the audit sector and the wider profession.

In addition, the Government has today launched a new independent review of the quality and effectiveness of the UK audit market, to be led by Donald Brydon, outgoing Chairman of the London Stock Exchange.

A need for change

It is important to remember that these reviews were triggered by a continual cycle of high-profile corporate failures, and subsequent intense political and media scrutiny.

This has produced a palpable crisis in public trust in our profession. As many readers will know, ICAEW – and I believe the wider profession – has fully recognised the need to embrace fundamental change in order to regain and retain that trust. We really are at a watershed moment.

The Kingman Review of the FRC

Sir John Kingman has proposed the abolition of the FRC – replacing it with a new body, with a new mission and new powers, to be operated under new leadership.

He has made very detailed and specific proposals regarding the funding and staffing of this organisation, its enforcement powers - which will now extend to all relevant main board directors, not just chartered accountants - and its role in the appointment of auditors in certain situations. Interestingly, audit firms will also have a ‘duty of alert’, to pre-empt corporate failures.

Sir John has suggested calling this new regulator the ‘Audit, Reporting and Governance Authority’, and that it should be funded through a mandatory levy on the audit and accountancy sector.

The CMA’s Market Study

The CMA set out to improve the independence and quality of audits, as well as to increase competition and choice within the sector. Its update report identifies a number of reasons why it believes audit is failing to meet the standards expected and required of it.

The CMA has proposed a series of legislative and regulatory changes – or ‘remedies’ - which include:

  • Splitting audit and advisory services within firms which offer both services – either via full structural separation or a more moderate division into separate operating entities, with separate management and accounts;
  • Increasing the scrutiny and accountability of audit committees and their appointment of auditors;
  • Imposing a ‘joint audit’ regime, whereby FTSE 350 audits are each carried out by two firms, at least one of which to be outside of the Big Four.

The CMA is seeking feedback on its proposals by Monday, 21 January, and is due to produce final recommendations by April

Independent review of audit

As a profession, chartered accountants accept the need for change. Between them, Sir John Kingman and the CMA have tackled underlying issues of regulation, quality and competition in the audit market, but we have argued for some time that the natural follow-on to their work should be a fundamental and independent examination of the role of audit itself. The expectations of investors and wider society have increased in recent years, and it is our duty to ensure that audit keeps pace and closes this expectation gap.

It is therefore very welcome indeed that the Government has asked Donald Brydon to conduct just such a review. Mr Brydon’s experience speaks for itself, and I believe he is an excellent choice for what is a vital project. ICAEW stands ready to support him in any and every way.

Moving forward

We’ve long been calling for a bold intervention to restore confidence in audit – and taken together, these three developments represent a big step in that direction.

We now need to study what Kingman and the CMA have said in detail: at the moment there are a number of areas which require clarification and – to be frank – challenge. Both reports will be subject to formal public consultation and debate over the next few months. We will be making our voice heard, starting with the parliamentary inquiry into the future of audit which begins next month, when we will be providing both written and oral evidence.

We are committed to working with all sides to turn these proposals into practical recommendations for regulation and legislation which will ensure that audit meets the future needs of British business and wider society.