Newsflash: BEIS consults on new Audit, Reporting and Governance Authority
The Department for Business, Energy and Industrial Strategy (BEIS) has released a consultation regarding its plans to implement the recommendations of Sir John Kingman. The Kingman Review of the Financial Reporting Council (FRC) reported in December 2018 with 83 recommendations.
The consultation makes clear that BEIS plans to set up the new Audit, Reporting and Governance Authority (ARGA), to replace the FRC, as proposed in the Kingman Review recommendations.
For the other recommendations, the Government is proposing an approach which places each of the recommendations into one of three categories:
- Reforms which can be delivered immediately, so that the benefits can be obtained without delay (35 recommendations);
- Reforms which can be delivered in advance of legislation but where there are significant policy choices to make in deciding how to implement (13 recommendations); and
- Recommendations which will require primary legislation, where views are sought now but where detailed proposals will be consulted on after further consideration (35 recommendations).
Some of the key recommendations which are included in each category are as follows:
Reforms which can be delivered immediately, so that the benefits can be obtained without delay
- working towards increased transparency on audit quality reviews, including taking forward the recommendation to publish audit quality inspection reports (anonymised in the first instance) and further review of the quality of component audit work conducted overseas (Recommendations 20-22);
- expanding the volume of corporate reporting review team (CRR) work on a risk-based basis including public reporting of CRR findings and related correspondence and directing changes to accounts. This is being done on a voluntary basis for now and will be underpinned by legislation as soon as Parliamentary time allows (Recommendations 24-26);
- ensuring the corporate reporting review team reviews the whole of the annual report including corporate governance (Recommendation 29);
- introducing a robust market intelligence function to identify emerging risks at an early stage, ensuring its perspective includes current and future risks (Recommendation 44); and
- reviewing and reforming viability statements to make them more effective (Recommendation 52) – the FRC has already stated that it will be consulting on amendments to its Guidance on Risk Management, Internal Control and Related Financial and Business Reporting.
Reforms which can be delivered in advance of legislation but where there are significant policy choices to make in deciding how to implement
- discussing strengthening qualitative regulation around a wider range of investor information with the Financial Conduct Authority (FCA) and FRC (Recommendation 30);
- pursuing the existing initiative to strengthen the Stewardship Code, currently out for consultation (Recommendation 42); and
- a detailed consultation on funding arrangements, which will address the question of which groups of market participants should fund the new authority and apportionment of costs (Recommendations 64-66).
Recommendations which will require primary legislation, where views are sought now but where detailed proposals will be consulted on after further consideration
- proposals to review and enhance the sanctions regime for audit and for directors, including an extension to the reach of the regulator’s audit enforcement action internationally (Recommendations 34-38);
- a recommendation that the Government introduces a duty of alert for auditors to report viability or other serious concerns (Recommendation 45);
- recommendations for involvement with companies, including that the new regulator should be able to require rapid explanations from companies, to commission skilled person reviews in certain circumstances and to publish these if in the public interest, to require companies to procure additional assurance or independent evaluations, to order the removal of the auditor and, in the most serious cases, to issue a report to shareholders (Recommendations 46-50);
- a strengthened framework around internal controls in the UK, on a similar basis to the Sarbanes-Oxley regime in the United States (Recommendation 51); and
- enhancement to the Independent Auditor’s Report to include “graduated” audit findings (Recommendation 53).
In addition, the consultation indicates that the Government believes that Sir John Kingman’s views regarding auditor appointment and independence, expressed in a side letter to BEIS at its request and outside the terms of reference of the Kingman Review, bear serious consideration. The Government therefore plans to consult on Sir John’s detailed proposals. These would retain the shareholder’s right to approve the audit appointment but also mean that the new ARGA would have the right to appoint the auditor in “a focused set of circumstances”, for example:
- where there were quality issues identified around the audit;
- where a company has parted with its auditor outside the normal rotation cycle; and
- where there has been a meaningful shareholder vote against auditor appointment.
Responses to the consultation should be submitted by 11 June 2019.
The BEIS press release outlines that a recruitment campaign has been launched for the Chair and Deputy Chair of the new ARGA. The FRC has announced that its Chair, Sir Win Bischoff, will step down once the Chair of the new regulator becomes effective.