The U.K. government has issued a 140-page document that outlines a long-awaited proposal to overhaul of the auditing industry. The proposal included plans to revise the definition of “public-interest entities” regarding regulation to include major private firms and to create a new regulatory body to oversee the auditing industry. Missing from the plans were more drastic measures, such as forcing Big Four accounting firms to split their audit and consulting units.
Among the plans outlined in the document, which accompanied the “Queen’s speech” given at the opening of Parliament, were:
- Establishing a new statutory regulator, the Audit, Reporting and Governance Authority, that will protect and promote the interests of investors, other users of corporate reporting and the wider public interest.
- Providing new measures to open up the market, including a new approach of managed shared audit in which challenger firms undertake a share of the work on large-scale audits. This will improve the quality and usefulness of audit; and boost resilience, competition, and choice in the audit market.
- Bringing the largest private companies in scope of regulation in the definition of ‘public interest entities’, recognizing the public interest in companies of this size.
- Giving the new regulator effective powers to enforce directors’ financial reporting duties, to supervise corporate reporting, and to oversee and regulate the accountancy and actuarial professions.
The government of Prime Minister, Boris Johnson, said the bill, planned to be drafted in the coming year, will be designed to: “Improve protection for the U.K. against risks to jobs, pensions, and suppliers from unexpected company collapses, by improving scrutiny of the largest non-listed companies and strengthening the insolvency framework to increase confidence in the system.”
Mixed Reviews
Reaction to the audit reform plans were mixed. “We are delighted that the government has committed to a draft Audit Reform Bill in the Queen’s Speech. We believe putting the audit regulator on a statutory footing with the legal powers it needs to do its job effectively, is vital to restoring trust in audit and corporate governance,” said John Wood, CEO of the Chartered Institute of Internal Auditors in the U.K. and Ireland.
Still, Wood wasn’t fully embracing of the U.K. government’s plan. “While this is a step in the right direction, we are somewhat disappointed that the important proposal for stronger internal company controls may now not be delivered by legislation. We urge the Government to get on and swiftly issue its full response to the White Paper it published over a year ago, including full details on how it plans on progressing some of the other key proposals, along with a clear timetable for implementation,” he said.
Others were more critical in their response. “The mention of audit reform in this Queen’s Speech is doubly disappointing,” said Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales. “First, the proposed scope of change is modest and, in particular, it constitutes a missed opportunity to address wider issues in corporate governance. This might well end up as the lopsided reform we have consistently warned against.”
The push for reform comes in the wake of some high-profile public company collapses in the United Kingdom, including construction company Carillion, retailer BHS, and travel firm Thomas Cook.
The Queen’s Speech, traditionally given by Queen Elizabeth II herself at the opening of Parliament, was actually given this year by Charles, Prince of Wales due to the Queen’s ailing health. The speech itself, which was brief, actually contained no mention of audit reform. The audit and governance plans were outlined in the full transcript of the Queen’s Speech. 
Joseph McCafferty is editor and publisher of Internal Audit 360°