The government has confirmed that it will replace the Financial Reporting Council (FRC) with a powerful new audit regulator as soon as parliamentary time is available
The long-trailed Audit, Reporting and Governance Authority (ARGA) will replace the FRC, and is definitely on the government’s agenda, despite widespread concerns across the profession that it could be delayed.
The Department for Business, Enterprise and Industrial Strategy (BEIS) will give a clearer indication of its plans for ARGA by the end of March.
Although a firm date has not been set for the actual establishment of ARGA, a BEIS spokesperson told Accountancy Daily that ‘we will take the next steps on audit reform in the first quarter of 2020 and will then bring forward legislation as soon as parliamentary time allows’.
The framework for the ARGA and the scope of new statutory powers to regulate auditors will be set out in a draft statutory instrument (SI) which needs to be put to parliament before being enacted. Draft legislation on ARGA will also be put out for consultation as part of the legislative process.
BEIS declined to comment on whether the statutory instrument had been drafted.
Last year the FRC was put on notice that it would be disbanded after the Kingman report was released. Kingman called for FRC’s replacement by a stronger regulatory body, capable of enforcing higher audit standards. This followed a catalogue of major corporate failures where Big Four and mid-tier auditors were embroiled in investigations over their conduct and failure to identify going concern issues. The FRC has been criticised repeatedly for being too slow to respond to critical corporate collapses and for the time it takes to complete investigations.
The creation of the new regulator was flagged in the Queen’s Speech last December, which stated that audit reform was prioritised, with the government committing to 'develop proposals on company audit and corporate reporting, including a stronger regulator with all the powers necessary to reform the sector.
'These proposals aim to improve public trust in business, following the three independent reviews commissioned in 2018. It will also help workers employed by a large company in future to know how resilient it is', the government said.
The failing audit regulator is being replaced following heavy criticism of its inability to monitor and regulate the audit market effectively, from the Competition and Markets Authority, MPs and the Kingman review, which called for a wholesale overhaul of the organisation.
The first stage of overhauling the regulator saw the replacement of the two most senior board executives last autumn. This saw the departure of long-serving CEO Stephen Haddrill, who was replaced by Sir Jon Thompson, former head of HMRC who had been instrumental in a major restructure of the tax authority involving office closures, redundancies and the creation of a network of superhub regional tax offices. Simon Dingemans was named as chair, following a long career at GlaxoSmithKline, taking over from Sir Win Bischoff when he stepped down.
In anticipation of the relaunch of the regulator, the FRC’s annual budget, released on 5 February, set out plans for a 13% increase in funding to £47.2m and an 18% hike in the preparers' levy paid by audit firms to fund future activity.
It also plans to recruit an additional 100 staff within the next 12 months to build up the enforcement team, which is responsible for investigating audit failures and examining audit quality.
Sir Jon Thompson, CEO of the FRC, said: ‘The strategy builds a bolder, more forceful regulator that will act with pace in supervising and holding companies to account.
‘Ahead of the FRC’s transition into the Audit, Reporting and Governance Authority (ARGA) I am determined we use our powers to the fullest, to respond to corporate governance challenges.
‘The failure of a major company has significant impact, not just for investors, but for employees and communities.”
‘The public has a major interest in the health of companies which is why we plan to serve that public interest by using our powers to the fullest within our existing regulatory scope.’
Report by Sara White