UK Accountancy Regulator and Big Four Dominance to be broken by UK Govt
By agreement with the six chartered accountancy bodies namely Association of Chartered Certified Accountants (ACCA), Chartered Accountants Ireland (CAI), Chartered Institute of Management Accountants (CIMA), Chartered Institute of Public Finance and Accountancy (CIPFA), Institute of Chartered Accountants in England and Wales (ICAEW) and Institute of Chartered Accountants of Scotland (ICAS), the Financial Reporting Council (FRC) has a non-statutory role for oversight of the regulation by the professional accountancy bodies of their members beyond those that are statutory auditors. The FRC promotes transparency and integrity in business. It regulates auditors, accountants and actuaries, and sets the UK’s Corporate Governance and Stewardship Codes.
FRC could be scrapped and replaced with a new body
- The UK Government has said that the UK’s accountancy regulator should be scrapped and replaced with a new body that has legal powers to improve the quality and standards of the auditing profession.
- A consultation has been launched with ministers saying the new rules, backed with legislation, will help avoid future large-scale company collapses, as auditors will be able to spot problems sooner.
- A new accountancy watchdog – the Audit, Reporting and Governance Authority (ARGA) – would be launched to implement the changes, replacing the Financial Reporting Council (FRC), including legal powers to force auditors and companies to resubmit their accounts without the need for court action.
- Directors of failed firms could also see their bonuses clawed back up to two years after a pay award is made, to clamp down on “rewards for failure”.
- Greater transparency in accounts would be expected to avoid large dividend and bonus payments being made at firms that could be facing insolvency – with “resilience statements” required.
- Auditors would also be expected to take a wider range of information into account, including environmental targets.
Dominance of ‘Big Four’ accountancy firms to be also broken
Proposals also include plans to break up the dominance of the ‘Big Four’ accountancy firms in the auditing sector, in order to avoid conflicts of interest. The Big Four is the nickname used to refer collectively to the four largest professional services networks in the world, consisting of the global accounting networks Deloitte, Ernst & Young, KPMG and Price water house Coopers.
The four networks are often grouped together for a number of reasons; they are each comparable in size relative to the rest of the market, both in terms of revenue and workforce; they are each considered equal in their ability to provide a wide scope of professional services to their clients; and, among those looking to start a career in professional services, particularly accounting, they are considered equally attractive networks to work in, because of the frequency with which these firms engage with Fortune 500 companies.
Business Secretary Kwasi Kwarteng, whose department is overseeing the changes, said that:
- Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.
- When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab.
- It was clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.
What would the amendments entail?
- Large companies would be required to use smaller auditor firms to conduct part of their annual audit, in an attempt to break the Big Four’s dominance.
- The Big Four could also face a cap on the number of companies on the FTSE 350 if improvements are not made.
- The government said last year almost a third of audits inspected on the FTSE 350 were in need of improvement.
- The largest private companies in the UK would also be expected to face greater scrutiny from regulators under the new rules.
There real issue was whether this package is sufficient to reform the broken audit market. Some proposals are welcome, including tougher penalties for individual company directors where there are serious failings, however it is regrettable that on the crucial issue of competition in the audit sector, the package waters down some of the independent recommendations for reform, including on mandatory joint audits between the big four and challenger firms. The consultation accepts the vast majority of recommendations made by three independent reviews into auditing and corporate reporting.
A report by Sir Donald Brydon in 2019 called for wider information and transparency, alongside enforceable principles for the profession. This followed a report by Sir John Kingman in 2018, which said the FRC should be scrapped and stricter rules placed on company directors. And a report by the Competition and Markets Authority last year said the Big Four should be split up to avoid market dominance.