The beleaguered audit regulator, the Financial Reporting Council (FRC), is planning to ask the next government for new powers to set auditor remuneration rates
Due to be re-launched as the Audit, Reporting and Governance Authority (ARGA) after a string of audit failures and lack of adequate oversight of the major audit firms, the FRC is reported to be looking for wider powers to curb the audit market by setting fixed audit fees for listed audits, according to reports in the Sunday Times.
The audit market is currently in turmoil, following numerous major audit failures related to the collapses of significant listed companies, including Carillion, BHS and Patisserie Valerie. Auditors at all these failed companies are facing FRC investigations into their audit practices and performance, and could face multimillion pound fines if they are found guilty of misconduct over the audits.
Plans to set up the ARGA require parliamentary approval, via a statutory instrument, which the last Conservative government failed to push through due to Brexit business dominating parliament. The creation of the ARGA would give the regulator wider powers of investigation, and the current FRC has a new leadership team in place, replacing long standing chair Win Bischoff and CEO Stephen Haddrill, both of whom left the organisation last month.
New chief, Sir Jon Thompson, most recently head of the HMRC and no stranger to radical reform at a major organisation, has promised a review of performance at the regulator and is considering a breakup of the powerful Big Four firms – PwC, Deloitte, EY and KPMG – to split their audit practices from the rest of the business, particularly the lucrative consulting and tax services income streams.
The proposal to break up the firms was suggested in the recent Competition & Markets Authority (CMA) review of the audit market, which also hinted that joint audits could be a solution to the current Big Four domination of the listed audit market. MPs have also criticised audit as a 'broken market'.
Under joint audit, a lead firm would be appointed, with a secondary auditor having oversight of the audit work, and sharing some of the work, although there could be complex liability issues to consider if this approach was taken.
In addition to concerns about auditor independence, there are also calls for an overhaul of the fundamental concept of audit, with the Brydon review due to report shortly. This review is expected to demand an overhaul of auditing standards to meet modern, global and digital business requirements. A senior audit partner told Accountancy Daily that ‘audit standards and processes were dated, and had barely changed in 30 years, making them inappropriate and not fit for purpose’.
The next government will need to prioritise audit reform, which would not only require putting the ARGA on a statutory basis, but also updating the Companies Act 2006 (CA 2006) to include a forensic element to listed audits, so that auditors would be required to flag any potential fraudulent activity, currently not part of their remit.
The FRC declined to comment during the election period.
By Sara White