While Covid-19 is currently the biggest issue facing accountants, the increased regulatory scrutiny of audits – and the growing attention from government and the public – is another key challenge the industry needs to tackle.
The Financial Reporting Council (FRC), which regulates auditors, accountants and actuaries and sets the UK's Corporate Governance and Stewardship codes, is itself no stranger to government and public attention. The spotlight is firmly on the FRC following the publication of the Kingman and Brydon reviews and the collapse of Thomas Cook, and the jury is still out as to whether this is its swan song before being replaced or whether its objectives have real long-term bite.
In 2018, Sir John Kingman recommended that the FRC be replaced with an independent statutory regulator, accountable to parliament. Named the Audit, Reporting and Governance Authority (ARGA), it would have a new mandate, new clarity of mission, new leadership and new powers.
Subsequently published in December 2019, Sir Donald Brydon's report recommended the formation of a separate industry for audit with its own governing principles, independent from the accounting profession. Brydon has also called on ARGA to set new qualifications for the sector.
Sir Jon Thompson, Chief Executive of the FRC:
“The FRC is facing a period of significant and sustained change. This strategy ensures we can begin to deliver market and regulatory reforms to promote long term confidence among investors and other stakeholders as the UK itself embraces a new economic and political reality. We are in close contact with the Government to manage the next stages of the reform process.”
Momentum was behind the calls for audit reform in 2019 and at the start of 2020, however, Covid-19 dominates the landscape for now. While much depends on the level of political engagement to implement changes, it is clear that further reform, such as the extension of the scope of audit to include the detection of fraud, is inevitable in the not too distant future.
The FRC released its plan and budget in March while still awaiting the government's proposed reforms that would allow it to expand on its long-term objectives for 2021. Although the regulator's focus was on larger firms, its plan is likely to impact all firms.
The FRC's most relevant priorities are:
a) Build and deepen supervision of the major audit firms, including governance, structure, audit quality management, culture and resilience.
b) Expand oversight of the professional bodies with decision-making powers about audit registration moving to the FRC.
Analysis of Lockton's claims data suggests that priority (a) reflects the current environment regarding causes of claims against the accounting profession. We see numerous claims arising from the breakdown in a business' risk culture, including failure of supervision, failure to diarise key dates and stress-related errors.
The Chartered Accountant Benevolent Association 2019 report found that just 2% of professionals were unaffected by stress in their job, with 31% feeling stressed on a daily basis. This is perhaps unsurprising considering the ever changing legislation and increased administrative burden.
We are seeing underwriters increasingly request detailed submissions regarding risk management before renewal, so it is important to regularly evaluate your firm's approach.
A few check points to consider are:
- Embed a risk management culture across the firm - all employees should be aware of risk management.
- Be more cognisant of employees' wellbeing and stress indicators and improve wellbeing-focused communications for all staff.
- Review your quality control processes and ensure all employees understand the supervision and control model.
- Have a risk rating system for new business.
- Familiarise yourself with regulator guidance on multifaceted areas of practice for all employees.
- Be able to evidence your risk management framework.
If you wish to discuss the issues raised within this article, please do not hesitate to contact your Account Executive or Claims Advocate.