UK: FRC position paper - the transition to the new regulator and other reforms

The Financial Reporting Council has today published a position paper in which it sets out the steps it will take, in support of the Government's recently announced proposals, to reform the UK's governance and audit framework, including its transition to the Audit, Reporting and Governance Authority: see here (pdf). 

The paper proposes, amongst other things, revisions to the UK Corporate Governance Code and the guidance that supports it on (a) board effectiveness, (b) audit committees and (c) risk management, internal control and related financial and business reporting. No revisions to the UK Stewardship Code are proposed because, towards the end of 2023, a review of the regulatory framework for effective stewardship, including the Code, is planned. This review will be undertaken by the FRC, FCA, Department for Work and Pensions and the Pensions Regulator.

UK: Government confirms proposals for audit and governance reform

The Department for Business, Energy and Industrial Strategy today published its response, and proposals, following last year's white paper consultation Restoring Trust in Audit and Corporate Governance: see here (pdf). The accompanying press release is available here.    

The Financial Reporting Council - set to become the Audit, Reporting and Governance Authority (ARGA) with new powers through legislation under the Government's plans - has welcomed the Government's proposals although its chief executive, Sir Jon Thompson, described as a "missed opportunity" the decision not to introduce a statutory version of the Sarbanes-Oxley internal control statement: see here. Instead, the Government will invite the FRC/ARGA to include such a statement in the UK Corporate Governance Code as part of a review of its internal control principles and provisions.

Dramatic changes to the auditing profession now seem most unlikely, the Government having decided against seeking to establish, at this stage, a new corporate auditing framework or a new professional body for auditing. Instead, ARGA is to be invited to work with the existing professonal bodies to improve auditor education and continuing professional development.

Other proposals include giving ARGA the power to set new minimum requirements for audit committees.  It will also be given the power to investigate and sanction certain breaches of reporting and auditing responsibilities by directors of public interest entities.

UK: FRC publishes three year plan (2022-2025)

The Financial Reporting Council has published its three year plan for 2022-2025: see here (pdf). The plan has been produced on the assumption that, during the three year period, the FRC will become the Audit, Reporting and Governance Authority, with new statutory powers (as set out in the 2021 white paper, Restoring Trust in Audit and Governance).

UK: Government consultation - audit and governance reform

A quick note. The Government has, this morning, published a press release announcing the start of a consultation on "wide-ranging reforms to modernise the country’s audit and corporate governance regime": see here. At the time this post was originally posted, the consultation document (a white paper, I believe) had not been published - it ought to appear here later today (most likely after the Secretary of State for Business, Energy and Industrial Strategy has delivered a statement about the reforms in Parliament - as is expected according to the order paper for today).

UK: FRC publishes 21/22 draft plan, strategy and budget

A few days ago the Financial Reporting Council published its draft plan, strategy and budget for 2021/22: see here (pdf). Alongside the work being done to create ARGA - the new Audit, Reporting and Governance Authority - the document notes the intention to "[u]ndertake assessments of performance against the UK Corporate Governance Code, the UK Stewardship Code and the Wates Corporate Governance Code for Large Private Companies. Subject to the outcome of Government consultation [a white paper is expected soon, the Financial Times has reported], consult on revisions to the UK Corporate Governance Code and associated guidance ahead of legislation"

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UK: Auditing - The Brydon review report and recommendations

The Brydon review's report concerning the quality and effectiveness of audit was published today: see here (pdf). It looks set to become a landmark publication in the development of the UK corporate governance framework. A list of the report's recommendations is available here (pdf). In its tone, and in the scope of the recommendations, the report calls for dramatic change. It extends beyond a narrow view of the audit process to consider the purpose of auditing (and the auditing profession) along with directors' reporting obligations and the role of audit committees.

Indeed, the report recommends the creation of a separate profession - corporate auditing - distinct from accounting, and operating within an overarching set of principles: the principles of corporate auditing.  It is recommended that the successor of the Financial Reporting Council - the Audit, Reporting and Governance Authority - should act as "midwife" for this new profession.

The report also recommends the adoption, in the Companies Act 2006, of this purpose of the statutory audit: “...to help establish and maintain deserved confidence in a company, in its directors and in the information for which they have responsibility to report, including the financial statements”.  Auditors should act in the public interest, the report states, and have regard to the interests of users beyond the shareholders. Moreover, the role of employees in the audit process is acknowledged with the recommendation that the directors seek the views of employees regarding the scope of any audit activity.

With regard to fraud, the report seeks to challenge the perception that auditors have no obligation to detect fraud and argue that they should endeavour to do so. It recommends that directors are subject to a new reporting duty: to set out the actions they have taken each year to prevent and detect material fraud. This would be subject to a corresponding duty, owed by the auditor, to state (1) how they have assured the directors' statement and (2) the additional steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.

UK: IoD publishes corporate governance manifesto

With the UK general election underway, the Institute of Directors has published a manifesto for corporate governance: see here (pdf). Amongst other things, the IoD calls for the establishment of an independent corporate governance commission, with oversight of the UK corporate governance and stewardships codes, and separate from the organisation - the Audit, Reporting and Governance Authority - that is to replace the Financial Reporting Council.

UK: The new chair of the Financial Reporting Council (ARGA)

The Department for Business, Energy and Industrial Strategy has today announced that Simon Dingemans is to become the new chair of the Financial Reporting Council and its successor organisation (the Audit, Reporting and Governance Authority): see here. Mr Dingemans will replace Sir Winfried Bischoff.

Mr Dingemans' appointment was subject to a pre-appointment hearing before the BEIS Committee in Parliament several days ago: see here. The Committee's report was published yesterday: see here. The Committee endorsed Mr Dingemans' appointment but noted its concern that he had "not fully appreciated the scale of the challenge ahead, and the degree of commitment required for an organisation in need of root-and-branch reform". The Committee also recommended that he should not take on any additional roles that could be perceived to compromise his independence.

NB: The Secretary of State at the BEIS Department announced, in a speech several days ago, that the new chief executive of the FRC/ARGA will be Sir Jonathan Thompson: see here.

UK: FRC plan and budget 2019/20

The Financial Reporting Council has published its plan and budget for 2019/20: see here (pdf). The work needed to establish the FRC's successor - the Accounting, Reporting and Governance Authority - is the first of five strategic priorities identified.

UK: FRC/ARGA - first Government remit letter published

One of the recommendations made by Sir John Kingman, in his review of the Financial Reporting Council, was that the Government should issue the FRC (and its propopsed successor: the Audit, Reporting and Governance Authority) with a remit letter, at least once during the lifetime of each Parliament, setting out "those aspects of economic policy that the regulator should have regard to when advancing its objectives and discharging its duties". It was also recommended that the FRC/ARGA should respond publicly to the remit letter. The first of these exchanges took place in March and have now been published: see here (pdf) and here (pdf).

UK: BEIS Committee proposes wide-ranging audit reforms

The Parliamentary Business, Energy and Industrial Strategy Committee has published its 'future of audit' report and recommendations: see here or here (pdf). A summary of the report's conclusions and wide-ranging recommendations can be found here. These were also outlined this morning in a speech by the Committee's chair, Rachel Reeves MP: see here.

The recommendations include: requiring auditors to present at company annual general meetings; encouraging the Competition and Markets Authority (CMA), as part of its statutory audit market study, to aim for the full legal separation of audit and non-audit services; if other remedies and reforms fail, the independent appointment of auditors should be considered; and the frequency of audit rotation should be increased by introducing a seven year, non-renewable, period of engagement.

The Committee also made recommendations concerning the creation of the proposed new regulator - the Audit, Reporting and Governance Authority (ARGA) - to replace the Financial Reporting Council (FRC). Current FRC board members, the Committee stated, should have no meaningful role in the reform process or management of ARGA. The Committee also stated its expectation that the new chair of the FRC (and subsequently ARGA), currently being recruited, would not be appointed until they had appeared before the Committee and the Committee had given its opinion.

UK: BEIS Committee report - 'Executive Rewards: paying for success'

The Business, Energy and Industrial Strategy Committee published its report 'Executive Rewards: paying for success' today: see here or here (pdf). The report is critical of the role played by institutional investors, remuneration committees and the Financial Reporting Council (FRC). The Committee calls for the simplifcation of pay, advocating a structure based on fixed salary plus deferred shares that would vest over a long period (and subject to provisions designed to prevent 'rewards for failure'). It also calls for remuneration committees to have at least one employee representative. 

The Committee is strongly supportive of the creation of the new Audit, Reporting and Governance Authority (ARGA), to replace the FRC, and states that the ARGA should be "a more empowered, aggressive and proactive regulator that has the ability to take decisive action, where necessary, on executive pay and its reporting" (para. 11). Many of the Committee's recommendations are directed at the ARGA, particularly with regard to the revised Stewardship Code and its enforcement, as well as the expectations placed on asset owners. The Committee also recommends that the ARGA should become responsible for monitoring the impact of the new Wates Principles of Corporate Governance for Large Private Companies.

UK: replacing the FRC with the new Audit, Reporting and Governance Authority

The Government, through the Department for Business, Energy and Industrial Strategy, has published a consultation paper in respect of the recommendations made by the Kingman Review of the Financial Reporting Council: see here (pdf).

The Government has, amongst other things, accepted the Review's recommendation that the FRC should be replaced by a new regulator to be called the Audit, Reporting and Governance Authority. The new Authority's powers, purpose and objectives will be contained in legislation and complemented by a remit letter from the Government. Ahead of the new Authority's creation through legislation, the paper explains that the FRC has voluntarily agreed to become bound by a remit letter from the Government and that such a letter has been issued.

Whilst primary legislation will also be required in respect of the new Authority's board, the Government has decided to make some changes to the current board of the FRC, including the appointment of a new chair and deputy chair; those appointed will, in due course, hold these positions with the new Authority.

The Government also states that it will work with the FRC as part of the current consultation on updating the UK Stewardship Code to ensure that the revised Code addresses the concerns raised in the Kingman Review. According to the Government, the UK Stewardship Code must be "demonstrably improved".