Kingman's review of the Financial Reporting Council (FRC) pulled few punches. It likened the FRC to "a rather ramshackle house, cobbled together with all sorts of extensions over time." It described FRC as serviceable but built on weak foundations. "It is time to build a new house."

That new house is the Audit Reporting and Governance Authority (ARGA), set out in the Department for Business Energy and Industrial Strategy (BEIS) white paper Restoring trust in audit and corporate governance. The government proposes giving ARGA new statutory objectives and functions, a new statutory levy and new powers concerning corporate reporting review, oversight of audit committees and directors' corporate reporting duties. 

More specifically, these powers include the ability to direct changes to company reports and accounts without a court order and the authority to require rapid explanations from a company where ARGA identifies 'reasonable concerns'. 

Setting up a new regulator is a necessary step to achieving effective reform. The regulator has to be equipped with an effective and appropriate range of statutory powers to enable it to do its work. But does ARGA fit the bill?

"The tone and attitude from the new regulator will be absolutely crucial in injecting greater resilience, competition, choice and quality into the PIE [Public Interest Entity] audit market," says Iain Wright, Managing Director, Reputation and Influence, ICAEW. "ARGA shouldn't be a soft touch and may sometimes need to use or threaten to use hard powers like sanctions to punish poor audit quality. But the threat of ever-growing time demands for compliance, coupled with increasing fines, does not encourage new entrants into the market. The threat of ever-greater regulatory risk and burdens, accompanied by stringent penalties that don't take into account the size and resources of a firm, may not only deter audit firms from entering into the market but may also convince existing players to withdraw. For a government committed – rightly – to enhancing resilience and choice, that would be a disaster."

As proposed, it's not clear where the boundaries of ARGA's remit will be drawn and whether it might overlap with other regulators. At a top level, you could question whether the objective set for the regulator is targeted enough. The white paper says, somewhat open-endedly: "The Government believes that ARGA's general objective should not only be to further the interests of investors and other users of company accounts and reports. It should also be required to consider the wider public interest, given the broader benefits to society which flow from its regulatory activities". 

"The objective for ARGA as set out in the whitepaper is too broad," says John Boulton, ICAEW's Director of Technical Policy. "Its objective talks about corporate governance in general terms, when the focus should be on directors' duties especially relating to reporting, accounts and audit. "We recognise the need of the regulator to take effective action against the reporting deficiencies in public interest entities," says Boulton. "So we are supportive of the regulator having effective enforcement powers over all directors, but that specifically needs to focus on directors' responsibilities in part 15 and part 16 of the Companies Act."

Dig a little deeper, and there are considerable gaps in detail in some areas. In others, it's too broad, straying into areas that aren't core to the remit of the regulator. 

"A regulator focused on avoiding the surprise failure of the most important entities in the economy, and ensuring the corporate reporting of those entities isn't undermined by fraud, is a really desirable thing," says Boulton. "However, the regulator proposed strays into a number of areas that are peripheral to achieving that objective."

One of the proposals is for ARGA to have statutory oversight of all chartered accountants. ICAEW's response to BEIS will strongly oppose this idea. The response points out that it is unclear why the proposals extend to the many chartered accountants who have no involvement in PIEs. That risks distracting ARGA from its core purpose.

Then there's the matter of capacity. With the extension of what classifies as a PIE adding more entities to its direct supervision, ARGA may struggle to regulate effectively without an influx of knowledgeable people to facilitate the work. That could take experienced staff away from other areas of the economy, where their skills are needed. Ultimately, it suggests a foundation that could set up ARGA with the wrong culture and mindset for effective action.

"The principles set out in the white paper are quite different from those in BEIS's Regulators' Code," Boulton explains. "BEIS's Code speaks to regulators carrying out their activities in a way that supports those they regulate to comply and grow. We think that ARGA's objectives should be inspired by that code, rather than what's proposed in the white paper. We need a regulator focused on improvement and growth – effective enforcement is a useful tool to reinforce this, but it shouldn't be seen as an end in itself. The white paper seems to focus too heavily on what the regulator does itself, rather than its role in a wider ecosystem of multiple actors or its role in encouraging improvement in what everybody does in that ecosystem. It should bring people along with it by supporting compliance."