As strong supporters of the Audit Firm Governance Code (the Code), ICAEW believes it has an important role to play in promoting public confidence in audit but warns that changes to the Code in isolation are unlikely to restore confidence. Instead, it wants changes to be better developed and integrated more closely within the wider audit reform agenda.

Since its creation in 2010, the Code has had a key objective of improving governance at the largest audit firms as a means of promoting public confidence in audit, with the Code introducing significant changes such as the requirement for the appointment of independent non–executives (INEs). In its response to the BEIS White Paper on restoring trust in audit and corporate governance, ICAEW highlighted the world-class status of the UK accountancy profession, emphasising that “Global accountancy firms originated in the UK and despite their presence across all parts of the world still look to the UK for leadership and quality”.

ICAEW believes the 2022 proposed revisions to the Code lack clarity, are excessively prescriptive and extend beyond the original purpose of the Code. It urges the FRC to address these concerns and present any changes within a compelling, cohesive package that enhances audit committee and investor engagement.

Integration with wider reform measures

ICAEW strongly advocates a ‘whole’ system approach to reform, including a new regulator and other changes across the corporate reporting system. Dr Nigel Sleigh-Johnson, ICAEW’s Director of Audit and Corporate Reporting, stressed that audit quality “is not just about auditors but about other players in the system. Integrating changes to the Code with other wider changes to the corporate reporting system will provide the best chance of promoting public confidence in audit”.

As we await the outcome of the BEIS reform consultation and considerations of audit reform commence in Europe, further revisions to the Code may be needed and ICAEW believes an approach lacking in integration will not embed efficient and tangible improvements to governance and quality.

Concerns have been raised over the timing of the revisions as audit firms are already facing major capacity challenges and are juggling implementing a number of new and revised auditing and quality management standards, which are expected to have a strong and positive impact upon governance and quality issues, with those firms with December year ends expressing concern over an implementation date as early as 1 January 2023.

In anticipation of the competition objective expected from ARGA in any proposed legislation, there are also fears that the practical, financial and administrative burdens of applying the Code are likely to deter audit firms from entering or remaining in the PIE or FTSE 350 audit markets, thus frustrating future market opening measures. 

Clarity of purpose

In its response, ICAEW’s Audit and Assurance Faculty states that the original focus of the Code has been lost and the revised Code extends beyond the core purpose of securing audit quality and resilience. John Boulton, ICAEW’s Director of Policy said the Code “currently has a clear purpose, promoting resilience and providing greater transparency around audit quality, enabling more informed choices between firms in the market. The changes confuse that purpose”. 

Revisions to the Code have been made to reflect the concept of ring-fencing and operational separation, which Big Four firms are already embarking upon; yet whole firm provisions and those added for the ring-fenced audit firm seem to sit uncomfortably together. The revised Code also has a broader scope beyond the UK entity and audit practice, with specific requirements in relation to global networks. Both could pose practical challenges for Independent Non-Executives. 

Boulton added: “Ultimately, it’s investors and audit committees that are expected to use the Transparency Reports the Code requires firms to prepare. To be valuable, changes must be decision-useful to them. That’s more likely where reforms form part of a visible and targeted package led by their needs.”

Proportionality, scalability and flexibility

ICAEW stresses that given the differences in structure, size and relationships with global networks, between audit firms, ensuring proportionality, scalability and flexibility within the Code is crucial. A ‘one-size-fits-all’ approach will not work and the excessive prescription evident within the 2022 Code is unlikely to be workable. As Sir Donald Brydon said in his review into the quality and effectiveness of audit: “What matters is that the right practice has been followed and that may well be different in different companies and at different times”.

The proposed revisions raise questions and concerns that the FRC need to address, as in isolation, these measures will not produce the outcomes the FRC envisages. The Code is an important part of the picture for reform, but it is not the complete picture. Only the right changes, integrated with the wider reform agenda, at the right time, will ensure enduring and substantial change across the wider corporate reporting system.

Read ICAEW’s response to the Proposed Revisions to the Audit Firm Governance Code.