ARGA’s Priorities For Delivery: Authority And Focus

ICAEW welcomes the vision set out in Sir John Kingman’s Independent Review of a strong and credible new regulator – the Audit, Reporting and Governance Authority (ARGA) – with enhanced responsibilities to intervene in the large corporate market. The ARGA’s core remit should be protecting the interests of investors and the wider public interest through the setting of high standards for corporate governance, financial reporting and statutory audit – and holding to account those companies and professional advisers who fail to meet them.

The establishment of ARGA is of paramount priority – while we understand the difficulty of securing space in the Parliamentary timetable for new primary legislation, early and urgent action to address public concerns it vital to maintaining confidence in business. Even strengthened by a new remit letter from the government, by amended articles of association, and with, in time, new senior leadership, the FRC lacks the necessary authority to ensure the reform programme gets under way with the necessary pace.

ARGA should have an initial focus on urgent priorities – the current issues affecting UK corporate governance and audit cannot wait for ARGA to acquire the resource and capability to undertaken all of its proposed objectives, duties and functions. ICAEW recommends that ARGA should initially concentrate on improving audit quality, governance and reporting rather than seeking to do everything at once – some of the complex, technical matters, though still important, are less urgent.

Better Regulation Principles

ICAEW has questions about the very wide scope of entities that ARGA’s new regulatory powers would apply to, their extent, and the time and resources necessary to implement them. We would be pleased to see an explicit commitment to the Hampton principles for better regulation written into ARGA’s remit, and that the details of how ARGA will be equipped to deliver on its objectives will be refined following this public consultation and by ARGA itself, once established.

The application of the Better Regulation principles is incredibly important – a rigorous impact assessment of the recommendations proposed not just by this review, but also those from the CMA and Sir Donald Brydon, as a complete package is essential. This has yet to be carried out and Government’s Better Regulation Framework suggests it should be.

The problems witnessed with audit are in many cases simple failures of conduct or quality – they demand simple, but robust responses which focus on the core objectives of governance, reporting and audit. ICAEW believes ARGA should initially focus on urgent priorities – improving the current regime with a renewed focus on avoiding disorderly failure, fresh thinking on fraud, better audit reporting and championing proportionality; and securing powers to supplement directors’ accountability and responsibilities under the Companies Act, enabling effective action to be brought.

While ICAEW welcomes and supports audit reform, the implementation of these proposals should be considered within the context of the wider financial reporting system. There should be recognition of the responsibility of directors to make judgments on how to reflect transactions in accordance with the financial reporting requirements, to prepare and approve the company accounts, and to prevent failure. Focusing solely on auditor requirements, without equal consideration of directors’ responsibilities, only takes into account one aspect of corporate failure.

Our Role As A Professional Body

In making suggestions for better and more effective regulation, ICAEW recognises the importance of our own role and responsibilities as a major professional body, and the potential for us to do more. This starts with explaining better to those with an interest in governance, reporting and audit what we and our members do.

Equipping Members To Meet Both Current And New Public Expectations

ICAEW recognises that the new objectives and scope of ARGA will place fresh demands on our members. This review aims to enhance the quality, accuracy and reliability of corporate reporting, governance and audit – we need to ensure those carrying out these functions can deliver what the public expects to a high professional and ethical standard. We also need to demonstrate that our qualification and CPD requirements can adapt to meet these new demands, and provide members with appropriate advice and guidance on technical and ethical issues and developments.

Encouraging And Contributing To The Policy Debate

ICAEW will continue to consult extensively with our members, working groups and committees in determining the way ahead. Achieving high quality, reliable governance, reporting and audit is a continuing process of improvement – ICAEW has helped support key developments on the road to more stable, transparent and international capital markets, and played a significant role in the evolution of corporate governance since the Cadbury Report in 1991. We will continue to be active in encouraging discussion in coming months and sharing insights which may be of relevance to the debate.

Developing New Thinking

The Audit and Assurance Faculty and the Corporate Governance programme, ‘Connect and Reflect’ at ICAEW have recently published a range of thought leadership publications considering issues relevant to this policy debate. These publications are intended to help directors, politicians and policy makers understand the key issues and will, inter alia, help to inform the various reviews currently in progress.

Our Role As A Regulator

ICAEW does not agree with the recommendations within Sir John Kingman’s Independent Review regarding the registration of audit firms as we cannot identify the problem they are seeking to solve. They imply and then seek to address a perception that it is inappropriate for decisions regarding the registration of firms carrying out Public-Interest Entity (PIE) audit work to be taken by the audit registration committees of the four recognised supervisory bodies (RSB) – as currently the case under Schedule 10 of the Companies Act 2006.

We are concerned that the review has not fully understood the current system of PIE audit firm registration – particularly the independence of the RSB’s audit registration committees and their ability, and readiness, to use a wide range of measures to tackle issues of poor performance by firms. The recommendations also underestimate the disruption and distraction which would be caused by consolidating the registration of audit firms within ARGA.