ARGA is coming
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Prime Minister Boris Johnson claimed that his plans spurred the most radical Queen’s Speech in a generation just before Christmas – and for the accountancy and audit profession, he could be right.
But what exactly are these plans, and what will they mean for you?
The government said that it will develop proposals on company audit and corporate reporting - including a new and stronger regulator with all the powers necessary to reform the sector.
The Queen’s Speech referred to the government’s proposal to create a stronger regulator – ARGA. But what is the government planning, and what exactly is ARGA?
A growing need
The Financial Reporting Council (FRC) has shown an increasing number of audit firms accused of providing poor audit quality – as revealed in its Annual Enforcement Review published last year.
In 2018/19, the total amount of fines on audit firms reached a staggering £40.6m (end of March 2019), in comparison to £14.8m in 2017/18. London law firm, RPC, recently estimated the fines issued amount to £24.9m in 2019 alone.
It looks as though there are some serious examples of misconduct in the profession – and some serious shortcomings.
The FRC faced a raft of criticisms that seemed to have gathered pace following the collapse of construction company Carillion in early 2018. The high-profile collapse of the multi-million-pound business put the public spotlight on the audit profession. Both regulator and firms were heavily criticised in their involvement, or rather their lack of involvement and awareness in the events leading up to the company’s collapse.
A new regulatory body
A series of reviews looking at the audit industry have concluded that that the UK’s current accountancy and audit regulator – the Financial Reporting Council (FRC) – needs to have greater powers – or to be replaced altogether by a new regulatory body called the Audit, Reporting and Governance Authority, or ARGA.
The details of the proposals were released in a report authored by Sir Donald Brydon supported by an advisory board made up of investors, companies and other professionals and an Auditor’s Advisory Group representing stakeholders across the entire financial services industry.
Perhaps the most significant recommendation is the separation of the audit profession from accountancy, making it a profession in its own right. ARGA should facilitate the establishment of this new profession and should be the regulator of it.
Brydon’s report states: “Auditing is too important to be left to an adjunct of another profession: it should be an independent profession in its own right, with its own governing principles, qualifications and standards.”
“I recommend that ARGA should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit.”
While legislation will be needed before ARGA can be established as the new regulator, the FRC has stated that it will work with the government to implement aspects of the transition which can be undertaken or initiated while the legislation is being prepared.
The Government is currently in the process of appointing a new leadership team at the regulator.
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A new profession
It is clear that ARGA will establish audit as a new profession, with its own governing body and based on a set of clearly understood principles, designed not just to demonstrate compliance with laws and rules, but to help its users know how confident they can be in the audited information itself.
Throughout the report, Brydon has taken an almost philosophical approach to his considerations and how he sees audit in society.
He wants to see the new regulatory body have more interaction with the audit industry pointing to recent business failures, where the failure of auditors to spot the fragility of those businesses resulted in the loss of jobs, savings, pensions, and tax revenues.
Reactions from figures in the industry were largely positive, but if the report is implemented, the recommendations could be disruptive to all audit firms, big and small. The position of these firms may change when directly confronted with such changes.
In his report, Brydon has said that the time for reviews is now over, and that it is now time for legislative and regulatory action.
To assess progress made over the next five years, he recommends an Independent Implementation Review in 2025 to report publicly on the progress made in relation to the recommendations made by each of these three Reviews.
If his recommendations are implemented, the industry as we know it could look very different by 2025 – and if your practice is involved in audits you may want to start looking at exactly what this might mean for your future plans.
With the greater use of digital technology and automation throughout the profession, it looks inevitable that there will be increased pressure for transparency and for the development of systems that are equal to the task. Investment will inevitably be required to meet the more stringent requirements that ARGA looks set to impose.
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