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Audit reforms: A once in a generation opportunity to transform audit

On 18 March 2021, the UK Government published its long-awaited white paper on restoring trust in audit and corporate governance. Senior audit leaders referred to the report as a “once in a generation opportunity to transform audit and corporate governance” and there is no doubt that the contents of the report were both encouraging and exciting.

You will be forgiven for not having read the full report in detail. It is after all, in excess of 200 pages long. A brief overview of its contents is as follows:

  • The requirement that large companies would be required to use a smaller “challenger” firm to conduct a meaningful portion of their annual audit.
  • The Big Four could also face a cap on their market share of FTSE 350 audits if competition in the sector does not improve.
  • Further details of a new regulator – the Audit, Reporting and Governance Authority (ARGA) – which could oversee the largest unlisted companies as well as those on the stock market. It would also have the power to impose an operational split between the audit and non-audit functions of accountancy firms, to reduce the risk of any conflicts of interest that may affect the standard of audit they provide.

The recommendations are encouraging, but there are a number of practical considerations with which I have concern. These include:

How the industry makes sure that audit as a profession remains attractive to young accountants

There is a risk that the actions arising from this report could be viewed as increased “red tape” which could in turn push people away from the profession. For the actions in the BEIS report to be successful, the audit world needs to be able to attract and retain the strongest young accountants and this has historically been a challenge for the profession. Likewise, the new regulator (ARGA) will also need to be able to attract the strongest calibre of professionals and has indicated that it will need to embark on a significant recruitment drive to be able to deal with the volume of regulatory matters that it will face.

Smaller firms are being encouraged to step-up as “challenger” firms, to audit a “meaningful proportion” of the subsidiary audits within a FTSE listed Group. It will be interesting to see whether firms consider that they have the technology, knowledge, expertise and risk appetite to be able to conduct this type of work and if over time, the market becomes less concentrated on the Big Four.

Having trained from within the Big Four, I understand the challenges faced by many small firms in attracting individuals with large corporate audit experience and this raises concerns that many firms may not volunteer to thrust themselves into a world of enhanced regulation and scrutiny, on the basis that they do not have the resources available to be able to conduct this type of work.

The timeliness of implementing these actions

The report is long overdue and it has taken several years to reach this point. I recently attended a webcast on the reforms, where the head of the FRC, Sir Jon Thompson acknowledged that it may not be until 2025 until these measures start to take effect. For many involved in the profession, the pace of these reforms has been frustratingly slow and there is a concern that by the time these reforms come around, they could be outdated.

I see it as critical that the UK business community provides input and cooperation on this agenda, which will help audit and the wider corporate governance program to evolve as quickly as possible. In recent months, I’ve been encouraged by the conversations I have had with Boards on the future of audit. If you are not obtaining the value you deserve from your audit process, now is the time to begin to act.

Ryan Moore is Head of Audit & Assurance and offers a full range of audit and assurance services to clients. If you are not tapping into the value that audit can offer, call Ryan on 01242 776000 or email ryan.moore@randall-payne.co.uk.

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