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What’s the latest on the proposed Audit reforms?
There have been several major audit reviews over the past few years following a series of high-profile corporate failures, cumulating in a government consultation and subsequent response, published in July 2023. The key aims of which were to rebuild trust and credibility in UK audit and corporate governance systems.
Key reforms included in the response:
- The creation of a new statutory regulator (the Audit, Reporting and Governance Authority – ARGA) with new responsibilities and powers, including “overseeing the accounting and actuarial professions, a stronger role in auditor registration, and new powers to tackle breaches of company directors’ duties relating to corporate reporting and audit”.
- ARGA has created 5 key strategic objectives which will transform the organisation into a new robust, independent, and high-performing regulator, acting in the public interest.
- Expanding “the scope of regulation to large private companies” – those with both 750+ employees and an annual turnover of £750m+.
- Changing reporting requirements to introduce a new statutory Resilience Statement, a new statutory Audit and Assurance Policy and material fraud statement” for companies within scope. This sets out the principal risks that impact the business and action to be taken.
- Ensuring that ARGA can direct changes to company reports and accounts, rather than having to seek a court order, along with powers to publish summary findings following a review.
- Giving ARGA powers to investigate and sanction directors for breaches of corporate reporting and audit-related duties.
- Giving ARGA responsibility for registration of auditors within scope, and ask professional bodies to improve auditor qualifications, skills, and training. The creation of greater mobility and capacity in the global audit market is key.
- A new statutory regime for the oversight of accountancy professional bodies and powers to investigate and sanction accountants.
- A package of measures intended to increase choice, improve resilience and enhance professional scepticism: notably giving challenger audit firms the opportunity to audit a meaningful proportion of subsidiary audits conducted for FTSE 350 companies; giving ARGA the ability to operate a ‘market share cap’; and powers for ARGA to require ‘operational separation’ of the largest firms and to monitor the health of audit firms.
We say
The consultation response scales down on some of the original proposals, including dropping a requirement for directors to sign off on companies’ internal controls and scaling back an expansion of the number of companies falling under the more rigorous reporting requirements. However, the proposals still represent the biggest shake up of the UK audit framework in many years and offer an enhanced level of assurance for stakeholders.
The parliamentary approval process is expected to take place shortly this autumn. If approved, these reporting requirements will be effective and apply to equity listed companies on UK regulated markets above the size criteria from 1 January 2025. All other UK companies meeting the size criteria will apply from January 2026.
In the meantime, it is advisable to ensure that your Boards, Audit Committees and Executives are aware of the draft legislation and the implications for both the business and their individual roles. Co-ordination of the implementation on the key requirements should be high on the Boards’ agendas for the coming year.
Recent changes in standards and impact on your audit
Revisions to the UK’s auditing standards have come into effect, addressing risk assessment and fraud.
The new standards applied first for those with December 2022 year ends and subsequently all statutory audits. These are revisions to two existing ISAs – ISA (UK) 315 and ISA (UK) 240, which we have summarised below.
What has changed?
Risk assessment (ISA (UK) 315)
With an increasing and complex company operating environment, there was an urgent requirement to update risk identification and assessment procedures for audits.
Some of the most notable changes include:
- Identification of the company’s key system of internal controls.
- Performance of risk assessment procedures to obtain and support the identification and assessment of the risk of a material misstatement.
- Five new risk factors to make risk assessments more comprehensive: subjectivity, complexity, uncertainty, change and susceptibility to misstatement due to management bias or fraud.
- A new risk spectrum has been added, with different levels of risks detailed on a scale.
- Documentation is key within the new standard to demonstrate how the auditor has evaluated the risk of material misstatement through their professional judgement.
- An increased focus on IT, specifically the IT environment, the path by which information flows through the entities information systems and general IT controls. There is now a minimum requirement for auditors to robustly document their understanding of the role of IT in the key financial transactions and processes.
- An increased focus on obtaining audit evidence from multiple sources both internally and externally to the entity. This may be with external regulators or reviewing governance matters including those with key management.
Fraud (ISA (UK) 240)
The new fraud audit standard clarifies the auditor’s objective to ‘obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud, including identifying and assessing risks of material misstatement, and obtaining sufficient appropriate audit evidence.’
The standard also addresses the inherent limitations and challenges of an audit in relation to fraud, particularly where management are colluding in fraud. Despite those challenges, it is still the auditor’s responsibility to obtain sufficient and appropriate audit evidence.
The focus of the changes to the standard is the mindset of auditors regarding scepticism and judgement. The FRC has introduced new requirements for auditors to consider what specialist knowledge and expertise they need to carry out an effective risk assessment for an audit that may have indicators of fraud.
Several new FRC standards include a ‘stand back provision’ which requires auditors to consider all of the work done during that audit and all evidence in the round before forming an opinion.
Ultimately, the new standard is about putting extra emphasis on professional scepticism and authenticity of documentation.
Impact on your audit
These changes mean that your auditor is likely to perform more focused audit procedures, however the impact on the controls and substantive testing will inevitably vary from entity to entity depending on the specific risks identified. All businesses should therefore be prepared for increased rigour from their audit moving forward.
Global audit standards to target greenwashing
The International Auditing and Assurance Standards Board (IAASB) is set to finalise new global audit standards to evaluate companies’ green credentials by the end of 2024.
The move comes in response to concerns from investors and stakeholders about the reliability of corporate disclosures on sustainability, with many flagging possible greenwashing as an issue. The IAASB believes that external and independent assurance based on globally accepted standards is crucial for building trust in corporate reporting. The proposals cover both reasonable and limited assurances, with the former being equivalent to an audit of financial statements.
IAASB chair Tom Seidenstein said: “Corporate reporting, whether financial or sustainability focused, is more trusted when it receives external and independent assurance based upon globally accepted standards independently developed in the public interest.” Nigel Sleigh-Johnson, director for audit and corporate reporting at the ICAEW, said the proposed standards were a much-needed underpinning for high quality disclosures.
Top 500 audit fee rise 14% to almost £1.3bn
Data from Thomson Reuters shows that the top 500 UK companies, including prominent names such as Tesco, Barclays, and Unilever, paid out a staggering £1.27 billion in audit fees by the end of March this year. This figure represents a 14% increase from the previous year’s £1.12bn and an even steeper ascent from the £1.05bn in 2020-21.
Audit fees for major UK companies have seen a significant rise over the past year, fuelled by a demand for enhanced audit quality and reporting, combined with an increasingly competitive recruitment marketplace and rising salary packages.
Furthermore, a recent report from the Financial Reporting Council (FRC) has stated that the concentration of audits with the Big Four firms has continued to reduce with 33 FTSE 350 audits being undertaken by non-Big Four audit firms compared with 27 last year.
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Jo has over 20 years of experience focusing on audit and business advisory, from small SME clients to AIM listed corporates.