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Reviews into the audit sector

  • United Kingdom
  • Financial services disputes and investigations
  • Litigation and dispute management

14-05-2020

The UK audit sector has been subject to 3 significant reviews in the last couple of years:

1.    The Competition and Markets Authority (CMA) Market Study

2.    The Kingman Review

3.    The Brydon Review 

In the most recent of these reviews Sir Brydon noted that many of the issues identified had been raised in the MacFarlane Report of 1992 but had not been addressed. He recommended that ARGA, the successor body to the FRC, be established with necessary powers as soon as possible. Nearly one and a half years’ on from Sir Kingman’s recommendations, we are still some way from the establishment of ARGA or any clarity on the scope and extent of its powers. This is despite the Government’s stated intention to act swiftly to bring it into being. Of course, since the Kingman recommendations for the establishment of a new regulator were made, Government has been busy dealing with Brexit and now Covid-19 issues. However, those lobbying for change will expect to see significant progress by the time of Sir Brydon’s proposed review on implementation in 2025. Perhaps with that in mind and in readiness for legislation that will bring ARGA into effect, BEIS has been working with the FRC to implement recommendations from the 3 reviews that do not require legislative intervention. In BEIS’s response to the Kingman Report (see timeline below), over half the Kingman recommendations were identified as ones which could be taken forward with the FRC before legislative reform.

The FRC has been providing regular updates on its transformation programme and in its latest update on 1 May 2020 highlighted several areas of work that those impacted by audit reform will be particularly interested in:

1.    Following the CMA review, the FRC has developed its thinking on mandatory shared audits. The FRC has not said when it will be publishing its work on this issue. It is a complex area which raises a number of issues around roles, responsibilities and liability which will need to be carefully worked through if shared audits are made mandatory.

2.    AFMAS is developing principles for operational separation of the Big 4 firms’ audit practices – the FRC has already been working with firms on this issue and steps have been taken by firms in response to the CMA’s findings in relation to governance and performance review.

3.    The FRC is  increasing the number and scope of its audit quality reviews (AQR) as well as reviewing the format of individual AQR reports with a view to publishing them starting from the 2020/21 inspection cycle. Currently one overview report is published in respect of each firm. Audited companies and firms will need to consider whether they will consent to the publication of individual reports.

4.    Of particular interest to Boards is the work the FRC are doing with BEIS in respect of the enforcement powers of ARGA and greater powers to hold non-accountant directors to account in respect of financial reporting.

We will be monitoring these developments closely and updating our timeline below as further information becomes available. Please look out for further updates from us.

Timeline of Reviews

Date

 

Action

Reference

17 April 2018

BEIS launched an independent review, led by Sir John Kingman, to examine the FRC’s governance, impact and powers.

 

https://www.gov.uk/government/news/government-launches-review-of-audit-regulator

9 October 2018

CMA launched market study into competition in the audit market.

 

https://assets.publishing.service.gov.uk/media/5bbc66f3e5274a222b994bfd/invitation_
to_comment.pdf

18 December 2018

BEIS launched an independent review led by Sir Donald Brydon into the quality and effectiveness of the UK audit market.

 

https://www.gov.uk/government/news/government-takes-next-step-in-improving-standards-
of-uk-audit-market-with-new-independent-review-into-audit-standards

18 December 2018

Kingman Report published.

 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/765622/frc-independent-review.pdf

 

11 March 2019

BEIS issued response to Kingman/initial public consultation on recommendations. Confirmed it was working with FRC to take forward over half of recommendations voluntarily ahead of legislation.

 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/784988/independent-review-financial-reporting-council-initial-consultation-recommendations.pdf

26 March 2019

BEIS committee published “The Future of Audit”.

 

https://publications.parliament.uk/pa/cm201719/cmselect/cmbeis/1718/1718.pdf

18 April 2019

CMA published the final report on its market study into the statutory audit market.

 

https://assets.publishing.service.gov.uk/media/5cb7855d40f0b649e47f2972/CMA_final_audit_
market_report.pdf

19 July 2019

The government published an initial consultation on recommendations made by the CMA in its final report.

 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/818667/statutory-audit-services-consultation-cma-recommendations.pdf

18 December 2019

Brydon Report published.

 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/852960/brydon-review-final-report.pdf
 

 

19 December 2019

The Queen’s Speech set out the government’s proposals to develop a stronger regulator with powers to reform the corporate reporting and audit sector.

 

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_
data/file/853886/Queen_s_Speech_December_2019_-_background_briefing_notes.pdf

5 February 2020

The FRC published a draft plan that sets out its initial response to the CMA, Brydon and Kingman reviews.

 

https://www.frc.org.uk/getattachment/2d440bbd-c346-4e00-a1ea-d0f5f1ef2dd0/FRC-Plan-Budget-2020-21.pdf

27 February 2020

FRC announced that it had written to the UK’s largest audit firms setting out the regulator’s expectations for operational separation to bring about audit quality improvements and audit market resilience.

 

https://www.frc.org.uk/news/february-2020-(1)/frc-writes-to-audit-firms-on-operational-seperatio

March 2020

Suggested date of draft statutory instrument re constitution of ARGA. This has not yet materialised.

 

20 March 2020

BEIS launched inquiry on Delivering Audit Reform following Brydon, Kingman and CMA reviews.

 

https://committees.parliament.uk/committee/365/business-energy-and-industrial-strategy-committee/news/145665/delivering-audit-reform-business-committee-launch-followup-inquiry/

1 May 2020

FRC published an update outlining the progress made in implementing the CMA, Brydon and Kingman recommendations and the next steps towards the FRC becoming ARGA.

 

https://www.frc.org.uk/news/may/update-on-frc-s-transformation-programme

31 July 2020

BEIS committee deadline for submission of written evidence on delivering audit reform.

 

 

Jan 2021

New governance structure to be implemented at FRC.

 

 

2025

Sir Brydon recommends that a follow-up review take place in 2025. This will assess how the three reviews have been implemented.