PQ editor Graham Hambly reports on major changes in UK regulation.
A new ‘enhanced’ regulator to transform the audit and accounting sector has been unveiled by the UK Business Secretary Greg Clark.
The Financial Reporting Council is being replaced with a new watchdog – the Audit, Reporting and Governance Authority (ARGA).
The UK government, in the guise of the Department for Business, Energy & Industry Strategy, said it now wants a new regulator with a new mandate, new leadership and stronger statutory powers. It has published a consultation for implementing these reforms and intends to move swiftly to implement the reforms and overhaul the sector. Recruitment for the new chair and deputy chair has been launched immediately.
In the interim period until the new regulator is in place, the government will be working with the FRC taking forward 48 of the independent review’s recommendations. It hopes these will address the shortcomings identified by Sir John Kingman, such as the lack of transparency and to reinforce work to enhance enforcement activity. Specifically, the new regulator will for the first time:
• Be a statutory body with powers to make direct changes to accounts, rather than apply to the court to do so, and be able to conduct more comprehensive, visible reviews for greater transparency.
• Have strategic direction and duties to protect the interests of customers and the public by setting high standards of statutory audit, corporate reporting and corporate governance, and by holding companies and professional advisors to account.
• Regulate the biggest audit firms directly, rather than those being delegated.
• Have a new, diverse board, and strong leadership to change the culture and rebuild respect of those it regulates.
The government has also promised greater sanctions in cases of corporate failure, including new powers to require rapid explanations from companies, and in the most serious cases publish a report about the company’s conduct and management.
The current FRC chair, Sir Win Bischoff said he welcomed the consultation and believed the speedy implementation of the recommendations will help increase public confidence in audit in the UK. “We will move forward to implement the agreed proposals as soon as possible,” he said. Consultation will now run until 11 June.
Meanwhile, the Institute of Directors has criticised the plans to include oversight of corporate governance in the remit of the new audit regulator. The IoD believes such a move could create confusion and even lead to a harsher ‘US-style’ regulation of businesses. In a letter to the business secretary, Greg Clark, it said what is needed is a new commission (similar to the one in Germany) to monitor corporate governance. The letter said: “Our fear is that the audit market regulation could have the unintended consequence of pushing the broader UK corporate governance framework towards a more legalistic, US-style regulatory approach with limited scope for flexibility.”