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Government proposals on restoring trust in audit

The Department for Business, Energy and Industrial Strategy (BEIS) have issued their proposals on reform of the audit market.

The proposals pick up on the recommendations made in the three reviews into the audit market that were carried out in 2018 (Kingman, CMA and Brydon), and include some changes that have long been suggested, such as:

  • Replacing the FRC with the new Audit, Reporting and Governance Authority (ARGA);
  • Requiring the Big 4 to separate their audit and non-audit practices;
  • Making directors more accountable for the information presented in the financial statements.; and
  • Shared audits will be introduced for most of the FTSE 350.

There are a number of proposals which will, if enacted, have significant repercussions for the audit market. Some of these have not necessarily been well publicised historically, but include things like:

  • Creating a new, stand-alone audit profession, with a new professional body for auditors;
  • Changing the definition of Public Interest Entities to include large private entities (there are two possible options for the qualifying criteria);
  • ARGA being responsible for deciding which individuals and firms should be approved to audit Public Interest Entities;
  • The possibility that ARGA should have responsibility for defining realised profits (a function currently fulfilled by ICAEW's Tech 02/17BL;
  • New distributable profits reporting requirements;
  • New legislation to allow AQR reports on individual audits to be published by ARGA without the need for consent from the audit firm and the audited entity.

The consultation is open until 8 July; if you are planning to respond, the proposals document runs to over 230 pages, with 98 questions posed, so make sure you set aside a good chunk of time to make your way through it all!

The consultation document is available from BEIS here: https://bit.ly/3ltbSde