The future of audit and corporate reporting (Part 1)

 

Governments love to get more power. Better still, they love to get more power but still be able to avoid the consequences if something goes wrong. 

So we have a body such as the Financial Reporting Council which oversees corporate reporting and auditors and which doesn’t appear to get fined for bad supervision when financial reporting or auditing goes wrong.  And now, at long last, we have a study – more than one – as to what has gone wrong, and surprise, surprise, the solution is to give a regulator a new name and more powers. 

The contradiction in thought is no more apparent than in those new powers.  It is proposed that ARGA (The Audit, Reporting and Governance Authority) is have full supervisory powers over all work that accountants do, rather than just audit, including in the words of Report : “all aspects of the chartered bodies’ regulatory functions, including training and qualifications, licensing, practice assurance, complaint handling, disciplinary procedures, and governance arrangements.”  It is also proposed that ARGA should set ethical standards.

So in one power grab, ARGA will become the body in charge of examinations, admission to membership, standard setter, investigator and disciplinary body.

The argument in favour of setting up the Independent disciplinary structure within ICAEW, which we were pushed to do and have done, was that one body should not be in charge of setting standards, qualifications, investigation and discipline.  Nonetheless, those are the powers that ARGA looks like getting. 

What applies to accountants will also apply to directors, at least of PIEs and corporate reporting under these proposals. 

It’s rather as if Parliament was allowed to act as lawmaker, police, judge and jury.  And that is never a good system.

As yet, giving all these powers to a single body, let alone an appointed quango, has yet to be challenged.  But it needs to be.

If we look into further contradictions in the approach, recall the powers that are being given to ARGA in respect of the accounting profession.  Then consider that the Brydon Review also recommended that any new regulator should have powers to act against companies were there were reasonable concerns over a wide range of matters including issues with reporting, governance, audit and viability.  It was also recommended that there should be powers to step in when a company was in distress.

The Government’s response has been to reject those recommendations.  The argument is that “would be a radical shift away from the UK’s approach to corporate governance, in which best practice is encouraged through a principles-based approach and through disclosures to shareholders, rather than through regulation. This system is highly regarded around the world.”

Well, it would.  But that argument is not being used for the audit and accountancy profession.  In fact, quite the contrary.  What is being proposed is substantially more regulation.  This, despite the fact that our profession is highly regarded around the world.  Indeed, given that audit failures (of which there are few) only have an impact if there were governance failures, or bad business decisions, within the audited company first, one might argue that the approach being taken is not only inconsistent, but backwards.

It is, of course, easier to pile regulation onto the accountancy profession than it is to deal with any root cause of lack of trust in business, or the profession, if it actually exists or indeed is a problem. And it is far easier to avoid being blamed for anything that goes wrong, if you can pass that blame onto the accountancy bodies or to the shareholders.

That is not to say there is nothing that needs to be done or that there is nothing good in the BEIS Report.  It is a huge curate’s egg and I will dive into bits of that rather scrambled egg in future posts:  but a regulatory power grab is not the best way of improving audit.  Unless of course, you are regulatory centralist at heart.