Company Audits Discussed by Hayvenhursts Accountancy Services
Business Secretary, Kwasi Kwarteng announced a major overhaul of the UK’s audit sector on 18th March 2021.
Hayvenhursts Accountancy Services is an Accountancy Business based in Cardiff that works across the UK and who as part of the Audit Reforms will be able to conduct a proportion of an audit on behalf of one of the Big Four Firms.
Major reforms to the UK’s audit industry are aimed at safeguarding British jobs, avoiding company failures and reinforcing the UK’s reputation as a world-leading destination for investment.
What is the Purpose of the Company Audit Reform?
The purpose of the reform is to stop the dominance of the Big Four Accountancy Firm Auditors. It will force them to use smaller “challenger” firms to conduct a proportion of their audits whilst still maintaining the main purpose of holding company directors to account in regards to a companies finances.
The reform aims to protect jobs, minimise and avoid company failures as well as lift the reputation and dependability of the UK as a place for investment.
Why has the Company Audit Reform come about?
Over the last few years, there have been concerns raised that providing both accountancy and auditing services from just one company can result in a conflict of interest.
Using just the big-name auditing businesses can put markets at risk during and following an audit.
The changes will support the growth of smaller auditing firms across the country, promoting new jobs and securing existing ones.
It will provide more transparency over a company’s accounts and the changes will help to deter firms from making largescale dividend and bonus payments when they are facing insolvency. Company directors will also be required to produce “resilience statements” as part of the reform making them more accountable.
The UK is consistently placed as one of the leading destinations for foreign investment in Europe and around the world, however, in recent years, investor and public confidence in how businesses are governed has been undermined and this has shown in the collapse of several large UK businesses. The aim of the reform is to enhance the reputation and dependability of the UK as a place for investment.
Reforms of the audit industry have been on the horizon for a few years after a number of high-profile company’s collapsed including Carillion, Thomas Cook and BHS. All leading to a high number of job losses, and as a result, the British taxpayer picking up the bill.
A number of smaller reviews in the audit market (the Competition and Markets Authority’s (CMA), the Brydon review, and the Kingman review) have all raised concerns over the governance and control within the auditing sector.
Hayvenhursts Accountancy Services is a smaller Challenger Accountancy Business in Cardiff that will be able to conduct a meaningful portion of an audit on behalf of one of the Big Four Firms.
Who are the Big Four in the Audit Industry?
- Ernst & Young (EY)
The Big Four is the name used to refer collectively to four of the largest professional accounting and auditing service networks in the world.
Their professional services include; audit, assurance, taxation, management consulting, actuarial, corporate finance, and legal services to their clients. A large majority of the audits of public and private companies are carried out by these four networks.
All of the Big Four Firms work across an array of industries which include:
- Wealth Management
- Government & Public Sector
- Private Equity
- Oil & Energy
- Financial Services
- Professional Services
- Real Estate
The Big Four are all made up of professional services networks that are all owned and managed independently but have contractual agreements within their network to share a common name, brand, intellectual property and quality processes and standards. Each network has a global body that coordinates the activities for their network.
What are the Main Proposals Within the White Paper?
- The big-name auditors, also known as the Big Four will have to make their audits more rigorous. In 2020 the UK government said that almost a third of audits inspected on the FTSE 350 needed improvement. The changes will enforce the Big Four to use smaller “challenger” firms like Hayvenhurst Accountancy Services to carry out a meaningful proportion of their annual audits. The benefits will be to reduce the supremacy of the big-name auditors which can put markets at risk during and after an audit, whilst supporting the growth and jobs within smaller accountancy audit firms across the UK
- If competition in the sector does not improve and the improvements don’t go far enough, the Big Four could potentially face a cap on the number of companies on the FTSE 350 index they are allowed to audit
- A new regulator, the Audit, Reporting and Governance Authority (ARGA), will oversee the largest unlisted companies as well as those on the stock market. They will also have the power to impose a split between the audit and non-audit functions of accountancy firms which will minimise the risk of any conflicts of interest which can affect the standard of the audits they provide
- The largest private companies in the UK would also face greater scrutiny from regulators under the new rules
In March 2021, Business Secretary, Kwarteng said the changes would help restore confidence in business in the UK.
“Restoring business confidence, but also people’s confidence in business is crucial to repairing our economy and building back better from the pandemic.
“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.
“By restoring trust in our corporate governance regime and encouraging greater transparency, we will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country.”
There will now be a 16-week consultation on the proposals.
Defined Proposals Within the Audit Reform
- New reporting obligations would be introduced for both Auditors and Directors as part of the reform to prevent fraud within businesses. Boards will be responsible for setting out the controls they have in place and external auditors will be required as part of the audit to look out for and investigate any problems
- Audits and auditors will be able to not only look at and review a company’s financial results but also look at their business-wide performance. The reviews can also include key climate targets and this will ensure investors and other interested parties are kept up to date and informed. This will hold companies to account to support the changes needed to happen to reduce climate change by 2050
- The new Audit, Reporting and Governance Authority (ARGA) regulator will be backed by legislation, funded by a mandatory levy which will give them more power than they have now to enforce certain standards. As an example, when serious issues are identified, ARGA will have the power to enforce companies to go back and redo their accounts without having to go through the courts as they do now
- Kwarteng aims to make directors of the UK’s largest companies more accountable if they have been negligent in their duties including:
- Directors facing fines or suspensions in serious cases, including significant errors as part of the audit reform with accounts and accounting, hiding or masking crucial information from auditors, or not having the correct policies and procedures in place when it comes to preventing fraud
- Sitting under the UK’s Corporate Governance Code, there will be tightening on ‘rewards for failures’ and directors’ contracts could have included that their bonuses will be repaid for up to 2 years after they have been paid if the company collapses, or there are serious director failings
- Large businesses will have to be more transparent about their financials, meaning they do not pay out dividends and bonuses at a time when they could be facing insolvency or there are financial concerns
- Directors would have to publish annual ‘resilience statements’ which would document and set out how their organisation is alleviating risks in both the short and long term. This should inspire and encourage directors to focus on the success of the company they are working for, consider and influence key issues including the impact of climate change
Leaders of the reviews into the audit market provided comment on the white paper.
Donald Brydon: I welcome the Government’s consultation and am pleased that they have accepted the core principles and the majority of the recommendations of my 2019 Review. I would urge all participants to engage with the important detail in this paper. The need for progress on these reforms remains urgent.”
John Kingman: “Since my 2018 report, much has already been done to strengthen regulation of UK audit, reporting and governance under new leadership at the FRC. The critical missing piece is to fix the regulator’s legal status and powers. I therefore very much welcome the Government’s consultation, and look forward to seeing this followed through with legislative action as soon as possible.”
CMA CEO Andrea Coscelli: We welcome the Government’s commitment to restoring trust in audit through these reforms. The consultation contains many good proposals, which reflect the CMA’s recommendations and – if they become law – will help improve the health and quality of the audit market.
“Ultimately these reforms must be judged on their results, so we are also pleased that the Government intends to take reserve powers to go further than the current proposals if these do not deliver the deep change that is needed to fix this broken market.”
The Big Four Accountancy firms also welcomed the proposals.
Jon Holt, head of audit at KPMG UK, said: “It is an ambitious package of strategic reform. Prioritising and clarifying the audit reform agenda is an important step to rebuild trust in the profession.”
Kevin Ellis, chairman and senior partner at PwC UK, also stressed that importance of “driving trust and confidence” in the profession.
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