In its response to the Independent Review of the Financial Reporting Council (FRC) led by Sir John Kingman, the ICAEW says it regards the establishment of ARGA (Auditing, Reporting and Governance Authority) as soon as possible as the paramount priority.
ICAEW said the creation of ARGA ‘should be taken forward with much greater urgency than is implied by its place in BEIS’ Category 3 for implementation. We feel strongly that the FRC – even strengthened by a new remit letter from the government, by amended articles of association, and with, in time, new senior leadership – lacks the necessary authority to ensure that the reform programme gets under way with the necessary pace and momentum’.
“While accepting the analysis of the BEIS Committee – that the audit sector is showing signs not just of an ‘expectation gap’ but a ‘delivery gap’ as well – we have argued that a necessary foundation for coherent and comprehensive reform should be a fundamental examination of the role of audit itself.
“The expectations of investors and other stakeholders such as employees, customers, suppliers and pension-holders have rightly increased in recent years – and the purpose, scope and practice of audit need to keep pace,” it added.
ICAEW wants the government to move quickly, saying that ‘early and urgent action’ is needed to address public concerns and to maintain confidence in business. However, it warned against over-burdening the new regulator: “Rather than attempting to do everything at once, we recommend that ARGA concentrate from the start on improving audit quality, governance and reporting, leaving some complex technical matters discussed in the Independent Review, which are important but less urgent, to be worked through in due course.”
ICAEW is also concerned about the context of reform. “In particular, the role and responsibility of directors to make judgments on how to reflect transactions in accordance with financial reporting requirements, to prepare and approve the company accounts, and to prevent failure. It is the auditors’ role, to test and challenge these judgments, and seek to detect issues that might lead to corporate failure. Focusing solely on auditor requirements, without equal consideration of directors’ responsibilities, only takes into account one aspect of corporate failure.”
However, the organization does not agree with the recommendations of Sir John Kingman’s Independent Review regarding the registration of audit firms, saying ‘to the extent that we cannot identify the problem they are trying to solve. The recommendations imply and then seek to address a perception that it is inappropriate for decisions regarding the registrations of firms carrying out Public-Interest Entity (PIE) audit work to be taken by the audit registration committees of the four recognised supervisory bodies (RSBs)’.
“We are concerned that this is based on a limited understanding of the current system, and in particular, a fundamental misunderstanding of the proven independence of audit registration committees, and their ability – and readiness – to use a wide range of measures to tackle issues of poor performance by firms.”