Written evidence submitted by UK Shareholders’ Association and ShareSoc (DAR0012)
Our key messages
1.1.1. We believe that this enquiry is enormously important in ensuring that much needed and meaningful change is achieved within audit, both as a service to users and as improvements to the profession. We would be very pleased to provide further feedback orally to your committee.
1.1.2. Our key points are as follows.
1.1.2.1. Audit quality: users want consistently good quality audits on which they can depend and which ensure that company financial reports provide an objective analysis of the companies’ performances and prospects of their businesses. Good quality audits need to be the main outcome that audit reform focuses on.
1.1.2.2. Coherence of the audit reform reviews: the three reviews do not fit together as a coherent package to deliver audit reform because they have been done in the wrong order. Brydon should have been done first, followed by Kingman and then the CMA review. The Brydon Review recommendations should be taken as a whole.
1.1.2.3. User and producer interaction: an essential requirement for audit reform is much better interaction between the users and producers of audits. Historically audits, auditors and audit committees have enjoyed almost no interaction with investors. Added to this, the FRC has lacked essential powers needed to provide effective regulatory oversight of audit and this problem has been exacerbated by probable “regulatory capture”. It is reassuring to see that much needed change is starting to take place, even before these audit reform reviews have been combined into a coherent package, with, in some cases, impressive results. It is important that change, in line with the appropriate recommendations that are taken forward, continues and does so at pace.
1.1.2.4. External signals: the new obligation to report on external signals (as recommended in the Brydon Review para 16.4) is one of the best ideas in these reviews as many investors believe that the risks of corporate failure for those close to a company are not difficult to spot well in advance of any failure.
1.1.2.5. Value added: some of the proposals if implemented are likely to create extra work for the auditors and will result in additional costs. In so far as this maintains or enhances good quality audits, it is entirely acceptable. However, too much of the content of annual reports consists of compliance driven “boiler plate” and obfuscating detail or marketing spin rather than good quality business reporting. There is a need to review and streamline annual reports so that they provide investors with meaningful information to which auditors and the audit process can really add value (see Kingman Review recommendation 23 at Appendix 1 2.2.9 and our view that good quality annual reports will support good quality audits by not distracting auditors from their core purposes).
1.1.2.6. Choice: the market cap recommendation to reduce the big four’s grip on the audit market will be a more practical and effective solution than joint or shared audits.
2.1. We are providing an evidence submission considering your six key questions:
2.1.1. Do the proposals from the three reviews of audit fit together as a coherent package that can deliver meaningful reform?
2.1.2. Which reforms can be delivered without legislation and what progress has the FRC made in implementing such reforms ahead of future legislation?
2.1.3. Will the reforms proposed by the audit industry itself address the failings that were identified by the reviews and the BEIS Committee’s Future of Audit Report?
2.1.4. When will the Government bring forward its proposals and the necessary legislation where required?
2.1.6. How will audit reform fit with wider corporate governance reform?
2.2. Please accept this letter as the main response or summary as less than 3,000 words. We believe this Word document including the appendices, and without logos, is less than 25MB.
2.3. UKSA and ShareSoc represent the interests of private shareholders. In addition to our own members, there are 5 million people who own shares and have investment accounts with platforms in the UK. The Office for National Statistics estimates that individual investors own 13.5% of the UK stock market by value. In addition to this there are many more who have money invested in shares via funds, pensions and savings products such as employee share ownership schemes.
2.4. We believe private shareholders mainly want quality from audits. As a result of the existing UK audit regime, including the way auditors are recognised, trained and monitored, this is provided generally and in at least 75% of audits (see last year’s FRC Audit Quality Review reports and ICAEW QAD reports). Quality of audits seems to be where the main issues arise, rather than in competition or resilience. However, determining whether an audit is not of sufficient quality is difficult except with hindsight and when something goes wrong. Therefore, the Brydon Review’s concept that audits should be user or consumer led rather than producer led is important. Audit reforms should allow for audits to be user or consumer led.
2.5. The problem with audits being driven by the requirements of users or consumers is they are not experts in audits and therefore require the cooperation of auditors as experts. Delivering audit reform requires a three way dialogue between the consumers of audits (ie members or shareholders of companies), their agents the Board or Audit Committee, and the expert auditors.
2.6. It seems to us that the mechanisms for quality audits are already in place and require them to be better or actually used; suggesting that legislation may not be required for most of the recommended reforms. However, this improvement from better use of existing mechanisms does require the main three parties, mentioned in 4 above, involved in audits being more proactive in their interactions with each other.
3.1. The simple answer to this question, in our view, is no. This is because the reviews were done in the wrong order. The Brydon Review is the most important from an audit quality point of view, followed by the Kingman Review and then the CMA’s. The reason for this revised order is that the review of audit purpose, quality and effectiveness (Brydon) needs to be considered before improving the regulator (Kingman), which in turn needs to be considered before competition and choice (CMA). We recommend that the suggested audit reforms of these reviews are taken in this order.
3.2. The answer to this question also depends on what is meant by “meaningful reform” and its intended outcomes, mainly by the consumers of audits. We would define “meaningful reform” as the improvement in the level of quality of all audits through changes required by consumers with the expert help of producers and the maintenance of and possible improvement in audit competition and auditor resilience. The main outcome of this “meaningful reform” should then be consistently good quality audits.
3.3. Preventing any regression in competitiveness and resilience is also important. Resilience was improved post Enron and the collapse of Arthur Andersen by the introduction in the UK by the FRC of the Audit Firm Governance Code and its subsequent iterations. This has gained more importance recently with the increasing interaction of investors with INEs of audit firms, despite the lack of readership of the firms’ Transparency Reports. These reports also suggest the audit firms are financially robust. However, the shortcomings of the firms’ transparency reports need to be addressed. The FRC’s review of transparency reports[1] notes:
3.3.1. 1) A lack of awareness amongst investors and Audit Committee Chairs that the reports exist; and 2) For those that are aware of the reports, a view that they are too long and overly positive to be useful. This is unsurprising given that many of the firms have seen the reports as a marketing opportunity rather than solely an accountability or compliance document.
3.3.2. We ourselves have noted that PwC’s latest transparency report, for example, runs to over 100 pages, much of which is of limited relevance.
3.4. Our experience also is that there is a healthy competitiveness between audit firms and the only possible detractors here are the possible shortages in choice and the selectors of auditors being traditionally finance directors rather than consumers of audit. It should also be noted that competition by itself will not ensure quality or value for money. Even the most comprehensive procurement process can be subverted by applying selection criteria which are either irrelevant or are ‘weighted’ to ensure that the winning bidder is determined even before tenders have been submitted. We suspect that this has often been the case with audit, where the winning bidder ends up being the one which management thinks they are most likely to be able to ‘get along with’.
3.5. Choice of auditors has been an issue for nearly 20 years since the big five reduced to four on the collapse of Arthur Andersen. However, this has not impacted detrimentally the competitiveness between firms. It will be damaging if the big four further reduced to three and therefore resilience of the firms is important. There is also a movement away from finance directors selecting auditors to selection being in the hands of audit committees using quality rather than price criteria. This direction is being pushed further by the suggestions of the Brydon Review, which we welcome.
3.6. The proposals from the three reviews require them to be considered in order of Brydon first, then Kingman and then CMA for them to fit together as a coherent package. The proposals leading to improved audit quality for consumers should be prioritised to deliver meaningful reform. The Brydon Review’s recommendations should also be taken as a holistic package, as they are meant to be. They should not be picked individually as, to do so, may result in audit quality and effectiveness being compromised. However, this should also mean not keeping impractical and/or irrelevant to audit reform recommendations if they are not workable or will not provide the main outcome looked for.
4.1. As we have already indicated, we believe a lot of the proposals may be delivered through the better and iterative interaction between consumers of audits, their agents of boards or audit committees and the producers of audits.
4.2. We have listed the proposals in our order of how the reviews should be prioritised in Appendix 1 and commented on whether or not we believe they are worth implementing as they should improve audit quality and whether we believe legislation is required to implement them.
4.3. We have not had time to ascertain what progress the FRC has made in implementing any reforms ahead of legislation and are therefore unable to answer this part of the question.
5.1. We have set out in Appendix 2 your conclusions and recommendations from The Future of Audit report and our thoughts on them in relation to audit quality, the requirement for legislation and whether they are related to corporate governance reform, in the same way as we have for the recommendations of the three audit reform reviews in Appendix 1.
5.2. As mentioned in 2 above, we believe the identified failings are mainly to do with existing mechanisms not being or badly used and from a lack of engagement between the three main parties of audits, the shareholders, audit committees and auditors. This leads us to think that the reforms or improvements that should address these failings will be those that are audit consumer led and supported; not least because the decisions need to continue to rest with shareholders more than any other parties.
5.3. We believe that the reforms proposed by the audit industry may address the identified failings. However, the failings appear to be due partly to past failings being addressed from an audit industry led point of view without much or any input from the consumers of audit. Therefore, it will be important for the audit industry proposals to be tempered by government and regulator leadership and ensuring that audit consumers are consulted properly on any proposed implementations of any proposed audit reforms.
6.1. We cannot answer this question.
6.2. However, we would suggest that they should not delay bringing forward its proposals and the necessary legislation. If possible, they should produce their proposals by the end of 2020, consult on them in the first half of 2021 and legislate in the second half of 2021 for implementation for audits of December 2021 year ends and after.
6.3. The proposals and the consultation should give greater weight to the comments of audit consumers tempered by the expertise of the audit producers. Those that are being audited should have no voice in the proposals.
7.1. We do not believe audit reform will help track this progress for two reasons. The first is that audits should not help companies meet their commitments, as this is the companies’ responsibility and they should be held accountable for it. The second is that audit reform should have the clear objective of sustaining and improving audit quality, which does not include tracking companies progress in meeting the UK’s SDG goals.
7.2. Audit reform may help provide assurance on the reliability of reporting of companies on meeting their SDG commitments if, because of such reform, companies are required by their members to have their SDG and TCFD reporting audited. However, this should not be a primary goal of audit reform, which should remain audit quality.
8.1. Wider corporate governance reform will need to recognise the audit reform proposals when agreed and implemented. This includes the three reviews’ proposals in respect of non auditor participants’ contributions to quality audits (for example the CEO and CFO sign off of controls envisaged by the Brydon Review; or the improved quality of annual reports and financial statements required so that auditors are not distracted from their main purpose as a result of poorly prepared annual reports and financial statements).
8.2. Where audit reform proposals may fit with wider corporate governance reform are indicated in the commentary on the proposals in Appendix 1.
August 2020
Delivering Audit Reform Inquiry – Call for evidence – Joint response from UKSA and ShareSoc on behalf of individual investors
Appendix 1 – Detail for second and last questions at 4 and 8 respectively
1.1. Para 3.20 - That there should be an Independent Implementation Review in 2025 to report publicly on the progress made in relation to the recommendations made by each of these three Reviews [Review of the Financial Reporting Council, Review of the Statutory Audit Market, Review of the Quality and Effectiveness of Audit].
1.1.1. We are not sure this needs legislating for. However, it will contribute to audit quality and the FRC or its successor ARGA should report annually on progress, which should then be considered in the independent implementation review in 2025.
1.2. Para 4.7 - That the Audit, Reporting and Governance Authority (ARGA) together with auditors and the Plain English Campaign produce an appropriately concise guide to audit, explaining clearly what the different elements of an audit report mean as redefined in this Report, and what, just as importantly, they do not mean.
1.2.1. This does not need legislation and could be produced relatively quickly by the FRC/ARGA with an update requirement of say every three years. It will help audit quality as it should make audit understandable to its consumer stakeholders.
1.3. Paras 5.1.3 – 5.1.4 - That the following statement be endorsed and adopted by ARGA and, insofar as it applies to statutory audit, the Government should consider how it may best be enshrined in the Companies Act (“CA06”): “The purpose of an audit is 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.”
1.4. Para 5.2.6 - That auditing should provide information that is useful to present and potential investors, lenders, creditors and other users in making rational investment, credit and other decisions and assessments about the company.
1.4.1. This is required to improve audit quality and should not need legislation to be implemented.
1.5. Para 5.3.2 - That auditors should be free to include original information, materially useful to a wide range of users, in their audit report and at the AGM, and not be confined to commenting on that which has already been stated by directors.
1.5.1. This is required to improve audit quality and should not need legislation to be implemented.
1.6. Para 5.3.12 - That the [existing auditor] obligation [to read and consider other information in the Annual Report and to report if they consider it to be materially misstated] should be extended to material outside the Annual Report that is used in investor presentations and RNS announcements.
1.6.1. This is required to improve audit quality and should not need legislation to be implemented.
1.7. Para 5.4.12 - That ARGA determines a framework for all corporate auditing, whether of financial statements or of other information.
1.7.1. This should improve the quality of corporate auditing of financial statements. We are not sure this requires legislation.
1.8. Para 6.0.11 - That ARGA acts as the midwife to create a new profession of corporate auditing, establishing the necessary professional body, to encompass today’s auditors and others with appropriate education and authorisation. ARGA would be the statutory supervisory body for that profession.
1.8.1. This will improve audit quality and requires legislation.
1.9. Para 6.0.16 - That there is one encompassing descriptor with a newly minted definition - "corporate auditor".
1.9.1. This needs to be considered with 1.8 and 1.8.1 above.
1.10. Para 6.1.2 - That an auditor’s authorisation to carry out audits in particular areas of activity should flow from tailored qualifications which they have achieved.
1.10.1. This will improve audit quality and requires legislation.
1.11. Para 6.3.4 - That the Principles of Corporate Auditing should be established to form an overarching framework governing the behaviour of corporate auditors, and that standards and rules should sit within this framework.
1.11.1. This will improve audit quality and should not need legislation for the FRC/ARGA to establish.
1.12. Para 6.4.5 - That each audit report contains a statement to the effect that in conducting the audit the auditor has acted faithfully in accordance with the Principles of Corporate Auditing.
1.12.1. This will improve audit quality and may need legislation for the FRC/ARGA to implement unless they can amend auditing standards for their UK implementation to include this.
1.13. Para 6.6.2 - That ARGA ensures that education, training and, if necessary, retraining, should take place consistently across this new profession.
1.13.1. This will improve quality and if the FRC/ARGA already has such powers as the UK’s Audit Authority, legislation will not be needed to ensure this. See also 1.35.1.
1.14. Para 6.6.14 - That the development of a specific auditor qualification, including education and training, should become a high priority for ARGA over the coming years.
1.14.1. This needs to be considered with 1.13 and 1.13.1 above.
1.15. Para 6.6.16 - That ARGA develops an agreed definition of professional judgment which builds on ISA (UK) 200.
1.15.1. This will improve audit quality and does not need legislation.
1.16. Para 6.8.5 - That the directors should set out in a Public Interest Statement (as part of the Strategic Report) how they view the company’s legal, financial, social and environmental responsibilities to the public interest. This Statement should explain how the company has discharged its self-declared public interest obligations and responsibilities, what actions it has taken to mitigate any externalities it has caused during the period, and how effective these actions have been.
1.16.1. This will improve audit quality through underpinning any auditing of such a statement and will require legislation. It should be linked to the legislative requirement of companies to report on how they have met their Companies Act sections 172 and 414CB requirements.
1.16.2. As a result, it is a wider corporate governance proposal that is needed to support audit reform.
1.17. Para 6.8.7 - That the audit report should state the extent to which the audit has yielded sufficient evidence of consistency between the content of the Public Interest Statement and the Annual Report and Accounts as a whole. The auditor’s opinion should state whether, based on the evidence reviewed, the directors’ Public Interest Statement is presented fairly in all material respects.
1.17.1. Referencing the answers at 1.16.1 and 2 above, this will improve audit quality and requires legislation.
1.18. Para 8.4.3 - That the audit report should include a new section in which the auditor states whether the company’s section 172 statement is based on observed reality, on the basis of the auditor’s knowledge of the company and its processes..
1.18.1. This will not enhance audit quality. It will provide confidence in section 172 statements. It does not require legislation.
1.19. Para 9.1.4 - That the directors’ Risk Report should be published prior to the audit committee meeting at which the scope of the next audit is determined and endorsed, leaving sufficient time for shareholders to comment. Alongside, the audit committee should publish a formal invitation to shareholders to express any requests they have regarding the areas of emphasis they wish the auditor to incorporate in the audit plan. The audit committee should state the auditor’s proposed materiality levels for the forthcoming audit with this invitation.
1.19.1. This will improve audit quality so long as shareholders engage and the information obtained from shareholders is passed onto auditors by audit committees to enhance their audit planning process. This does not require legislation.
1.19.2. This is a wider corporate governance proposal that is needed to support audit reform.
1.20. Para 9.1.6 - That if the auditor considers there are other risks of similar or greater significance to those reported by the directors, based on its knowledge of the company, the auditor should report this fact.
1.20.1. This will improve audit quality if such significant risks are recognised in the audit process as well as being reported. This does not require legislation.
1.21. Para 9.1.11 - That the audit committee and the auditor be required to publish the reasons why they accepted or rejected any such requests [for items to be included in the audit plan] in their Reports.
1.21.1. This is a natural follow on to the recommendation at 1.19 above and our answer at 1.19.1 and 1.19.2, which we would repeat here.
1.22. Para 9.4.5 - A change in the law to require the audit fees to be shown on the face of the profit and loss account as being struck, like the dividend, after the reporting of post-incentive compensation profit. Para 9.4.9 - That the audit committee chair should be delegated to negotiate the fees for the relevant audit work. The Board, as a whole, should agree a budget for the audit committee - the assurance budget - within which the fees would be included. Para 9.4.14 - That, similarly [to ratings agencies], audit firms establish an independent fee-setting function making its decisions separately from those conducting the audit.
1.22.1. These three audit fee related recommendations will not necessarily improve audit quality and to a certain extent miss the point that audit fees should be adequate to ensure an audit is of sufficient quality to meet the requirements of shareholders.
1.22.2. Audit fees do not need to be shown on the face of the profit and loss account so long as they are shown somewhere in the financial statements.
1.22.3. Audit fees should be agreed between the board and its audit committee and the auditor and both sides of the negotiation need to be satisfied that it allows for a quality audit in the interests of an audit’s main consumers, the shareholders, without paying more than is needed. This should be an iterative negotiation process through an audit so that any required variations, for example for additional work or less work not envisaged in the planning stage, may be agreed on. The audit committee report should inform shareholders on how the audit fee was determined and agreed and why it is thought that it should ensure a quality audit is carried out.
1.22.4. In respect of an independent fee setting function within audit firms, the main conflict should be mitigated by the board/audit committee and auditor ongoing fee negotiation.
1.22.5. Our suggested audit fee setting process, which adapts the existing one, should result in the main objective of being adequate to ensure an audit is of sufficient quality to meet the requirements of shareholders. If it is not, then shareholders may vote against the AGM resolution on auditors’ remuneration and follow up with feedback on how boards/audit committees should get it right or even request that it be handled by representatives of shareholders. This does not, as far as we are aware, require legislation.
1.23. Para 9.5.6 - That a standing item be added to AGM agendas: questions to the chair of the audit committee and to the auditor.
1.23.1. This will improve audit quality but should recognise that all shareholders may not necessarily be able to attend all AGMs, especially those with investments in companies holding AGMs at the same time. Therefore, there should be an additional recommendation that allows for shareholder with audit committee and auditor dialogue outside AGMs. This does not require legislation as it may be implemented by companies in the same way as they organise governance meetings.
1.24. Para 9.6.3 - That a new body - the Audit Users Review Board - be established, comprising solely users of audit reports, to review proposals from and give advice to ARGA as to the evolution of audit.
1.24.1. This will improve the quality of audits so long as the “users of audit reports” are proper consumers of audits for the purpose defined by the Brydon Review - The purpose of an audit is 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. This should mean mainly beneficial equity shareholder owners of companies and not their intermediaries or agents, for example sell side analysts. This does not need legislation. See also 1.57.1 below.
1.25. Para 10.0.3 - That the audit committee publish a three-year rolling Audit and Assurance Policy which would be put to an annual advisory vote by shareholders for approval at the Annual General Meeting.
1.25.1. This will improve audit quality. However, one thing missing from the Brydon Review’s suggestions on contents is an explanation of how audit quality will be assessed.
1.25.2. As remuneration policy AGM resolutions are not advisory, we cannot see the point of audit and assurance policy AGM resolutions also being advisory and therefore suggest they are not. This may require legislation.
1.26. 10.2.2 - That a simple mechanism to enable the workforce to raise issues around risks and assurance should be developed in each company, so that the designated director (or other mechanism) be the recipient of those inputs. The company should then have an obligation to respond to the workforce as to the way in which it has reacted to their requests.
1.26.1. The workforce raised issues around risks and assurance should go to the audit committee, not the designated director (or other mechanism (unless it is the audit committee)), and the audit committee should communicate these to the auditor and report on how it and the auditor have reacted to such requests in the same way as envisaged by the recommendation at 1.21 above. This will also enhance audit quality and does not require legislation.
1.27. Para 11.9 - That the Companies Act and ISA (UK) 700 be amended to replace “true and fair” with “present fairly, in all material respects”.
1.27.1. We suspect this recommendation, which will require legislation, will be highly controversial. We understand the arguments that the Brydon Review has used to underpin its recommendation but believe there may be as many good counter arguments. This recommendation will need extensive consultation, not least on how “true and fair” is interpreted in UK company law and whether anything significant in this will be missing if changed to “present fairly, in all material respects”.
1.27.2. However, on such a consultation’s conclusion, there should be a better understanding of an auditor’s reported opinion, which in turn should help audit quality.
1.28. Para 11.15 - That auditors judge their opinion on any use or proposed use by directors of the (now) fairly presented override in the context of their obligation to be faithful to the Principles of Corporate Auditing.
1.28.1. Subject to how the 1.27 recommendation is dealt with and implemented, this should also enhance audit quality and should not need legislation.
1.29. Para 12.4 - That the Government review the Companies Act to see if it could be improved to give more clarity as to what is meant by “adequate accounting records”. Given the complex requirements modern accounting creates, either through law or regulation, there should be an obligation for auditors to assess that the directors have maintained accounting records to a standard beyond the minimum level necessary for an audit to be performed. In doing so, the objective should be a High-Quality Audit as defined in this Report.
1.29.1. This will improve audit quality in that good quality company reporting will enhance audit quality and good quality company reporting depends on there being adequate accounting records. It seems to us that poor audits result from auditors trying, in their audit process, to compensate for the deficiencies of the companies they audit, adversely impacting independence, objectivity and professional scepticism. Adequate accounting records, and what this means, should mitigate against such resulting poor audits. This looks as if it requires legislation.
1.30. Para 12.8 - That ARGA promptly develop guidance for auditors around their responsibilities in relation to accounting records.
1.30.1. This will improve audit quality in the same way as envisaged by our answer at 1.29.1 above. It does not require legislation and may go some way to help the Government review on the meaning of adequate accounting records recommended at 1.29 above.
1.31. Para 13.1.8 - That the Government gives serious consideration to mandating a UK Internal Controls Statement consisting of a signed attestation by the CEO and CFO to the Board that an evaluation of the effectiveness of the company’s internal controls over financial reporting has been completed and whether or not they were effective, as in SOX 302(c) and (d). This attestation should be received by the Board no later than 28 days before the accounts of the company for the relevant financial period are signed. The Board should then report to shareholders that it has received such an attestation.
1.31.1. This will improve audit quality in that audits will not be distracted from their main purpose if there are good controls within an organisation as attested to; similar to there being adequate accounting records as mentioned in our answers at 1.29.1 and 1.30.1 above. Audits are usually enhanced where there are good control environments as such audits may rely more on controls audit testing than substantive testing.
1.31.2. It will require legislation.
1.31.3. This is a wider corporate governance proposal that is needed to support audit reform.
1.32. Para 13.1.11 - That the Audit Committee Chairs Independent Forum (ACCIF) develops principles that should be followed by CEOs and CFOs in making an internal controls effectiveness attestation. Final endorsement of these principles should be made by ARGA.
1.32.1. This sounds as if it will support the previous recommendation at 1.31 above and in so doing will support the improvement of audit quality. It is not clear why the Brydon Review has chosen ACCIF to develop the principles, but we agree that any such principles should be endorsed by the audit regulator, ARGA. We would go further and suggest the ARGA endorsement process should consult consumers of audits, mainly shareholders, and producers of audits.
1.32.2. This will not require legislation
1.32.3. This is a wider corporate governance proposal that is needed to support audit reform.
1.33. Para 14.1.5 - That ARGA amends ISA (UK) 240 to make clear that it is the obligation of an auditor to endeavour to detect material fraud in all reasonable ways.
1.33.1. This will improve audit quality by clarifying auditors’ responsibilities in relation to fraud and thereby reducing some of the expectations gap. Perhaps more importantly, it should be an obligation of the auditor to ensure that appropriate internal controls are in place within the organisation to detect material frauds and that that these controls are working. It does not need legislation.
1.34. Para 14.2.2 - That directors should report on the actions they have taken to fulfil their obligations to prevent and detect material fraud against the background of their fraud risk assessment.
1.34.1. This may improve audit quality indirectly as it should result in such reports being reviewed by auditors to see if such information contradicts the results of their work on the financial statements and/or points to a material error in the financial statements. See our comment in 1.33.1 above about fraud detection systems or internal controls. Not all of these need to reside within the organisation. Some may be based on simple comparative checks (industry norms) run by the audit firm.
1.34.2. The recommendation does not require legislation and is a wider corporate governance proposal that is needed to support audit reform.
1.35. Para 14.3.3 - That training in both forensic accounting and fraud awareness be part of the formal qualification and continuous learning process to practise as a financial statements’ auditor. In developing qualifications for auditors of other areas of activity, parallel training should be established.
1.35.1. This will improve audit quality. With reference to 1.13.1 above, this may not need legislation. However, the education, training and continuous professional development of an auditor as envisaged in the Brydon Review needs to carefully consider the main subjects needed to be an auditor, including understanding business, its purposes, drives and processes.
1.36. Para 14.3.5 - That the auditor’s report state explicitly the work performed to conclude whether the directors’ statement regarding the actions they have taken to prevent and detect material fraud is appropriate. Furthermore, the auditors should state what steps they have taken to assess the effectiveness of the relevant controls and to detect any such fraud.
1.36.1. This requires the recommendation at 1.34 above to be implemented. It will improve audit quality and does not require legislation.
1.37. Para 14.4.3 - That ARGA maintains an open access case study register detailing corporate frauds that have occurred in order that auditors can learn in real time from these frauds.
1.37.1. This will improve audit quality by helping to inform auditors of potential frauds and how to mitigate them; and does not need legislation. However, it does need providers of fraud cases and these should not be just auditors as Brydon suggests. They should be any participant in the corporate world that has experience of frauds, including the cases that come before the proposed Auditor Fraud Panel mentioned at 1.38 below, that have impacted companies’ financial statements in a material way.
1.38. Para 14.5.4 - That ARGA establish an independent Auditor Fraud Panel to which it would refer the results of any investigations into auditor failure to detect material frauds and that such a Panel should be equipped with the ability to levy sanctions on auditors as appropriate.
1.38.1. Along with the other fraud related recommendations, this will help improve audit quality and does not need legislation. However, we think that such an independent investigation panel should be set up to not only review audit failures to detect material frauds but also to review other audit failures in the context of the reasons given for such a panel in the Brydon Review.
1.39. Para 16.4 - That there should be an obligation on the auditors to report to both the audit committee and the shareholders on the extent to which their work has been influenced and informed (or not) by any external signals which might imply enhanced risk in the company whose financial statements are being audited.
1.39.1. This is probably one of the best ideas in audit reform as most shareholders believe that corporate failures are well signalled and therefore these signals should be reacted to by corporates and their auditors. It would help if shareholders and other key stakeholders flagged these signals to their investments and their auditors in addition to relying on auditors to pick up the external signals. This will improve audit quality as it will go some way to reducing the expectations gap and underpin the purpose of audit as articulated in the Brydon Review. It does not require legislation.
1.40. Para 16.7 - That ARGA should develop a menu of possible signals [regarding enhanced risk] and the auditors should report against the relevant parts of that menu.
1.40.1. This underpins the previous recommendation at 1.39 above and will enhance audit quality and does not require legislation. ARGA should remind auditors and the corporates they audit of this list every year in the same way as the FRC currently provides those participants in audits with things to look out for; and the list should be kept up to date each year.
1.41. Para 17.0.4 - That the audit committee should describe the content of the debate [regarding differences of view between management and auditors] and its outcome, including the justification for the agreed treatment. For example, where the differences of view would have led to material changes in valuation, even when these differences have been resolved, the audit committee should report on the range of the initial views and where in that range the agreed valuation lies.
1.41.1. This will improve audit quality as it will provide more information on areas of judgement and estimates that are one of the main areas that audit quality falls down on. It does not require legislation.
1.41.2. This is a wider corporate governance proposal that is needed to support audit reform.
1.42. Para 17.1.2 - That the consequences of potential differences in treatment of goodwill and intangibles considered by management and the auditor should also be made transparent.
1.42.1. This will improve audit quality for the same reason as we gave above at 1.41.1. However, goodwill and intangibles are not usually seen as a main area of focus by shareholders, especially if they result from mergers and acquisitions of other businesses, intellectual property or similar. They may be more of interest if they are the result of capitalising profit and loss account expenditure items such as software development people costs. It does not require legislation.
1.42.2. If provided by the audit committee, this is a wider corporate governance proposal that is needed to support audit reform.
1.43. Para 17.2.6 - That ARGA develop a series of examples which would illustrate, non-exclusively, the types of culture that auditors should reference in their report where there is an observed disconnect between the culture of the company claimed by the directors and the behaviour observed by the auditors.
1.43.1. This would enhance audit quality as it would reduce the likelihood of corporates reporting a culture that is not observed by the auditors and the risk of aggressive accounting practices. It does not require legislation.
1.44. Para 17.3.3 - That the auditor explain in each of the two succeeding audit reports what procedures have been undertaken and what conclusions reached in relation to those matters [KAMs or identified deficiencies]; the auditor should also highlight what actions have been taken by the company in response to deficiencies identified in the prior year’s audit.
1.44.1. Assuming this is a proportional requirement, ie related to material KAMs and identified deficiencies, it will improve audit quality and does not require legislation.
1.45. Para 17.5.9 - That the evolution of graduated findings be left to the marketplace for audit services.
1.45.1. This is accepted on the basis that recommendations 17.0.4, 17.1.2, 17.2.6 and 17.3.3 are implemented as they all more or less feed into potential graduated findings, which will be a natural result of those recommendations and therefore can be left to the marketplace.
1.46. Para 18.1.2 - That the board should make a Resilience Statement that incorporates, enhances and builds on the [current] Going Concern and Viability Statements. Para 18.1.5 - That ARGA requires auditors to report to the Board of Directors if they have encountered any information in the course of their audit which leads to an anxiety about the resilience of the business not reflected in the Resilience Statement. If they consider the Board does not pay sufficient attention to their anxieties, they should have an obligation to report to ARGA, or an alternative regulator depending on the circumstances.
1.46.1. These together will enhance audit quality and do not require legislation.
1.46.2. These are wider corporate governance proposals that are needed to support audit reform.
1.47. Para 20.1.5 - That Alternative Performance Measures should be subject to audit.
1.47.1. While this recommendation will not enhance audit quality, it will provide assurance of performance measures used and reported on by management and more confidence in those measures by users.
1.47.2. It does not require legislation. However, it may eventually be implemented when the IASB introduce new IFRS requiring management performance measures (“MPMs”) related to primary financial statement lines to be disclosed in notes to the financial statements with explanations of how they are calculated and reconciled to the primary financial statement line items. The IASB currently has an exposure draft out for consultation, titled “General Presentation and Disclosures”, proposing income statement related MPMs are disclosed.
1.48. Para 20.2.8 - That any Key Performance Indicators used for the purpose of calculating executive remuneration should be subject to audit.
1.48.1. Again, this recommendation will not improve audit quality, but it will improve the confidence of financial reporting users in non GAAP performance measures used in determining executive remuneration that are not usually subject to audit. It does not require legislation.
1.49. Para 21.5 - That directors report to shareholders on their company's payment policies and performance and that this be subject to some level of audit, as described in the company's Audit and Assurance Policy.
1.49.1. This recommendation will not in itself improve audit quality but will underpin confidence in a reporting company if the disclosures are good and have been assured by audit.
1.49.2. It does not require legislation.
1.49.3. This is a wider corporate governance proposal that is needed to support audit reform.
1.50. Para 22.7 - That the relevant Statutory Auditor for a particular audited PIE be added to the list of Prescribed Persons under the Public Interest Disclosure Act. Para 22.9 - That the protections available to employees should be extended to others with a direct economic relationship with the entities being audited. These would encompass shareholders, suppliers, customers and any other creditors. Such individuals should also be afforded protection when whistleblowing to ARGA.
1.50.1. These recommendations will enhance audit quality as they provide safe harbour to relevant potential whistleblowers (eg employees and shareholders) who raise concerns with a PIE’s statutory auditor and/or ARGA. These recommendations appear to require legislation. See also 1.57.1 below.
1.51. Para 23.0.12 - That amendments are made to the Companies Act to clarify and strengthen the process by which auditors and companies inform shareholders and other stakeholders of an auditor’s resignation, dismissal or decision not to participate in a retender. Para 23.1.2 - That on the resignation or dismissal of its auditor the company would be required to hold a General Meeting, within 42 days of receiving the letter of resignation or sending a notice of dismissal, at which the departing auditor would be required to answer questions from shareholders; the Board would be required to explain how it proposes to appoint a new auditor and manage the transition, consistent with its Audit and Assurance Policy.
1.51.1. These will improve audit quality as they will enhance the independence of and mitigate any risk of pressure on auditors from those they are auditing or may audit. They will require legislation (amendments to the Companies Act).
1.52. Para 24.1.8 - That BEIS and ARGA work with auditors to create the necessary protections and policies for audit to be able to use data from the companies they audit in order to promote better quality audits.
1.52.1. This recommendation will enhance audit quality as it should bring up to date auditor protections on and access to data, especially digital produced and stored data, required for their audit. If such data is not accessible, it contradicts the expectation that auditors have access to everything in the entity they are auditing.
1.52.2. This is likely to require legislation.
1.53. Para 24.1.11 - That, in the audit report, auditors should explain the reasons for the necessity and basis of any sampling techniques used in conducting the audit.
1.53.1. This will improve audit quality as it will underpin the level of assurance provided by and confidence in the audit tests where such sampling is used. This does not require legislation.
1.54. Para 25.0.4 - That s534 CA06 be explicit that a board that recommends, in good faith, the application of an LLA to its auditor is not in breach of its responsibilities. Para 25.1.3 - That ARGA facilitates a structured dialogue between investors and auditors to define a liability regime that would cause fewer obstacles to a more informative audit.
1.54.1. The arguments for these recommendations are good, especially the one that any enhanced auditor liability from adopted and implemented Brydon Review recommendations may prevent them being adopted. Therefore, there is a need to get the audit liability regime right to ensure good quality, effective and more informative audits. These recommendations should go some way towards this. The first one will require legislation.
1.54.2. Getting the audit liability balance right should also move the focus of corporate failures onto those usually most responsible for them, the directors and management. This should be in the interests of investors and an outcome looked for within the suggested structured dialogue in getting over any scepticism of receiving anything in return if they accepted liability limitation.
1.55. Para 25.2.3 - That firms conducting statutory audits of Public Interest Entities should publish separated financial information, including profitability, of the audit practice and that such firms should publish a remuneration policy and the annual remuneration of each relevant Senior Statutory Auditor.
1.55.1. This will not improve audit quality, but it will help towards assessing the resilience of the audit firms and their audit practices. To some extent firms’ Transparency Reports provide this information and, as recommended here, they could go further. This does not need legislation, but it may help if FRC/ARGA updated the Audit Firm Governance Code to require Transparency Reports to provide this information.
1.56. Para 25.2.5 - That individual statutory audit reports detail the number of hours spent in conducting the audit by grade of auditor.
1.56.1. This will improve audit quality indirectly in that it will provide information over time to assess whether audit resources were adequate to provide a good quality audit. However, this information should be corroborated by reconciling the total audit fees by grade of auditor to the disclosed audit fee in the financial statements. It does not need legislation.
1.57. Para 26.3.2 - That ARGA establish a formal confidential mechanism to interact with shareholders or other stakeholders to respond to concerns regarding particular audits.
1.57.1. This is a helpful recommendation and should improve audit quality more from a whistleblowing perspective and therefore in conjunction with the Paras 22.7 and 22.9 recommendations mentioned at 1.50 above, rather than the Para 9.6.3 recommendation at 1.24 above as suggested in the Brydon Review. It does not require legislation but may not be practical to implement until the whistleblowing recommendations are implemented by any required legislation.
1.58. Para 27.1.7 - That audit committee minutes be published with a time-lag of 12-18 months and with approved redactions.
1.58.1. This will not improve audit quality and should not be required if audit committee reporting is improved and the other audit committee related recommendations in the Brydon Review are implemented. Instead of shareholders not permitting audit committee minutes becoming bland as suggested in the Brydon Review, it would be better for shareholders not to permit bland audit committee reporting and to drive the other audit committee related recommendations in the Brydon Review. We are not supportive of this recommendation.
1.58.2. This recommendation should not require legislation and is a wider corporate governance proposal that is needed to support audit reform.
2.1. Chapter 1 – FRC: structure and purpose
2.1.1. Recommendation 1: The Review recommends that the FRC should be replaced as soon as possible with a new independent regulator with clear statutory powers and objectives.
2.1.1.1. This will not improve audit quality itself but should underpin the provision of audit quality.
2.1.1.2. This will need legislation.
2.1.2. Recommendation 2: The Review recommends that the new regulator’s statutory powers, purpose and objectives should be complemented – like the FCA’s – by a remit letter from the Government 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. The regulator should respond publicly to this letter.
2.1.2.1. This will not improve audit quality.
2.1.2.2. We do not know if this requires legislation but on the face of the recommendation, it would appear that it does not and requires only the commitment of each parliament to submit the remit and for the FRC/ARGA to publicly reply.
2.1.3. Recommendation 3: The Review recommends that the new regulator should be named the Audit, Reporting and Governance Authority.
2.1.3.1. This will not improve audit quality.
2.1.3.2. As an aside, it may be worth considering putting this name of the regulator in the order of its priorities for companies – Governance, Reporting and Audit Authority.
2.1.3.3. This does require legislation.
2.1.4. Recommendation 4: The Review proposes that the new regulator should have the following strategic objective: “To protect the interests of users of financial information and the wider public interest by setting high standards of statutory audit, corporate reporting and corporate governance, and by holding to account the companies and professional advisers responsible for meeting those standards.”
2.1.4.1. This will improve and underpin audit quality.
2.1.4.2. This should not need legislation and should be within the FRC’s/ARGA’s powers to adopt as soon as possible except where it needs parties such as all directors and corporate brokers, who are not answerable to it for corporate reporting, auditing and corporate governance, to be so answerable.
2.1.5. Recommendation 5: The full set of duties that the Review proposes be placed on the new regulator are below, requiring that it should act in a way which: • Is forward-looking, seeking to anticipate and where possible act on emerging corporate governance, reporting or audit risks, both in the short and the longer term; • Promotes competition in the market for statutory audit services; • Advances innovation and quality improvements; • Promotes brevity, comprehensibility and usefulness in corporate reporting; • Is proportionate, having regard to the size and resources of those being regulated and balancing the costs and benefits of regulatory action; • Is collaborative, working closely with other regulators both in the UK and internationally; and • Prioritises regulatory activity on the basis of risk, having regard to the Regulators’ Code.
2.1.5.1. This will not in itself improve audit quality but will underpin it.
2.1.5.2. With reference to 2.1.3.2 above, it puts corporate governance, reporting and audit in the priority order that is right.
2.1.5.3. This will need legislation.
2.1.6. Recommendation 6: The Review recommends that the new regulator’s duties will guide the new regulator in carrying out its core functions on audit and corporate reporting. The Review proposes that its functions should also include: • To set and apply high corporate governance, reporting and audit standards; • To regulate and be responsible for the registration of the audit profession; • To maintain and promote the UK Corporate Governance Code and the UK Stewardship Code, reporting annually on compliance with the Codes; • To maintain wide and deep relationships with investors and other users of financial information; • To monitor and report on developments in the audit market, including trends in audit pricing, the extent of any cross-subsidy from non-audit work and the implications for the quality of audit; and • To appoint inspectors to investigate a company’s affairs where there are public interest concerns about any matter that falls within the Authority’s statutory competence.
2.1.6.1. This will improve audit quality through carrying out its core functions on audit and corporate reporting, setting and applying high reporting and audit standards, regulating and registering the audit profession, and monitoring and reporting on the implications for the quality of audit.
2.1.6.2. This will need legislation to ensure its core and other functions. However, before such legislation, it should be within the FRC’s/ARGA’s abilities to implement some of these functions without legislation.
2.1.7. Recommendation 7: The new regulator will require a new board with significant new powers and responsibilities in a challenging environment. It will need to demonstrate strong leadership to effect the major shift in tone and culture to rebuild the respect of those it regulates and other stakeholders. There should be some, but only limited, continuity from the existing FRC board.
2.1.7.1. This should underpin audit quality by providing appropriate stewardship of the new regulator and its new powers and responsibilities. However, it will need the new regulator and its powers and duties to be in place, some if not all of which may need legislation.
2.1.7.2. In the context of this recommendation, it is unfortunate that Simon Dingemans had to resign as Chair of the FRC/ARGA when he and the new CEO, Sir Jon Thompson, seemed to be working well together in driving the recommendations of the three reviews in so far as they are able. However, if Simon Dingemans’ resignation is a sign that conflicts of interest are now taken more seriously, this is welcome.
2.1.8. Recommendation 8: The Review recommends that the new regulator’s board should be significantly smaller than the current one.
2.1.8.1. This is not relevant to audit quality.
2.1.9. Recommendation 9: The regulator’s board should comprise a mix of the skills, experience and knowledge needed to ensure strategic direction and effective, constructive challenge to the executive. It should not seek to be “representative” of stakeholder interests. In line with provisions in the UK Corporate Governance Code, appointments should be diverse, based on merit and objective criteria.
2.1.9.1. This will improve audit quality so long as some of the board constituents have the requisite skills, knowledge and experience of audit to support and challenge the executive on their audit quality improvement activities.
2.1.9.2. This may need legislation.
2.1.10. Recommendation 10: The Review recommends that all appointments to the regulator’s board, including the CEO, should be public appointments approved by the Secretary of State for Business, Energy and Industrial Strategy.
2.1.10.1. This will underpin audit quality by helping to avoid ‘regulatory capture’ so long as BEIS approved appointments ensure that the requisite skills, knowledge and experience of the board are appropriate for improving audit quality and progressing audit reform. See also points made at 2.1.7 and 2.1.9 above.
2.1.10.2. This will require legislation.
2.1.11. Recommendation 11: There should be a consistent approach to the appointments process and all board, committee and senior posts should be openly advertised with headhunters used.
2.1.11.1. This should underpin audit quality so long as the approach and process ensure relevant selection criteria are used to support the maintenance and improvement of audit quality.
2.1.11.2. This does not need legislation.
2.1.12. Recommendation 12: The Review recommends that the posts of chair and CEO should be subject to confirmation hearings with the BEIS Select Committee, if the committee wishes.
2.1.12.1. This may improve audit quality where the committee wishes such hearings where needed to ensure recommendations 9 to 11 are being met in the selection and appointment of the posts of chair and CEO.
2.1.12.2. We are not sure if this needs legislation.
2.1.13. Recommendation 13: The Review recommends that the Government, working with the chair of the new board, should review the existing FRC committee and panel structure with a view to achieving a significant simplification of the architecture in line with the principles set out in the Review. Thereafter, there should be a rigorous annual evaluation of the performance of the board, its committees, the chair and individual directors.
2.1.13.1. This may underpin audit quality and appears to have been done with the new structure, because of recent impacts of COVID-19, now being due to be in place from the beginning of 2021.
2.1.13.2. It will be important that any new Chair replacing Simon Dingemans (see 2.1.7.2 above) supports the new structure.
2.1.14. Recommendation 14: The Review recommends that the board of the new regulator should exercise significantly stronger ownership and oversight of the investigation and enforcement functions. The regulator should ensure that its internal rules and procedures enable the board to: • Take decisions itself on whether to launch audit investigations in cases it regards as of particular significance or public interest. The Review does not anticipate the board taking decisions in many such cases, but it should maintain an ability to do so; • Require regular reports from the Conduct Committee and from the director of enforcement on progress being made with investigations and any subsequent enforcement decisions; and • Question the director of enforcement at any point where it considers that a particular decision or investigation is taking too long.
2.1.14.1. This should help improve audit quality and requires recommendation 13 to be implemented in so far as the FRC/ARGA architecture affects the investigation and enforcement functions relating to audit quality.
2.1.14.2. It should not require legislation.
2.2. Chapter 2 - FRC: effectiveness of core functions
2.2.1. Recommendation 15: The Review recommends that the approval and registration of audit firms conducting PIE audits should be reclaimed from the RSBs. The Government should work with the regulator to develop and consult on the detail of how this regime should operate.
2.2.1.1. This should underpin audit quality by ensuring registered firms meet the required audit quality requirements in a more independent way than currently.
2.2.1.2. This will require legislation.
2.2.2. Recommendation 16: The Review recommends the new regime for the approval and registration of audit firms conducting PIE audits should incorporate a range of sanctions including some that are less severe than the ‘nuclear option’ of audit firm deregistration.
2.2.2.1. This will help improve audit quality as the range of sanctions should include those that will be constructive for audit quality as the objectives of audit quality should be aligned for the audit regulator, the providers of audit and the customers of audit, namely shareholders.
2.2.2.2. As the new regime will need legislation, this recommendation will as well.
2.2.3. Recommendation 17: The Review strongly welcomes the proposal that a piece of independent work should be done to explore the issues arising from the audit expectation gap, which have not been addressed in this Review. It is essential that this should be driven, and be seen to be driven, by the interests of users of accounts.
2.2.3.1. We believe this recommendation has been met by the Brydon Review and recommendations.
2.2.4. Recommendation 18: The Government should review the UK’s definition of a PIE.
2.2.4.1. This will not in itself improve audit quality and we believe it is already being progressed.
2.2.5. Recommendation 19: The Review recommends that AFMA should not be carried out on a voluntary basis, but instead the regulator should have statutory power to carry out this monitoring work. It is critical that this monitoring work is performed by individuals with the appropriate skills and seniority.
2.2.5.1. This Audit Firm Monitoring Approach if carried out on a mandatory basis within the regulator’s statutory powers will help improve audit quality by seeking out and addressing any firm structural issues affecting audit quality.
2.2.5.2. This recommendation will require legislation.
2.2.6. Recommendation 20: The Review recommends that the new regulator should work towards a position where individual audit quality inspection reports, including gradings, are published in full upon completion of AQRs. This will, however, be a major step, requiring a high level of confidence in the AQR process. For the present, as a first and interim step, the Review recommends publication of AQR reports on an anonymised basis (similar to the approach taken in the US and the Netherlands, for example).
2.2.6.1. We are not convinced that this recommendation will help improve audit quality. We do recognise that there is a need for greater transparency of audit quality findings, as the Kingman Review was told unanimously by investors and representatives of the 100 Group of Finance Directors. However, we cannot see how the publication of individual inspection results and gradings will contribute to audit quality. This recommendation was provided before the Brydon Review and may have been superseded by it. It should be revisited by FRC/ARGA to see if there is a better way of providing transparency of audit quality findings that constructively provides good audit quality outcomes.
2.2.7. Recommendation 21: The Review recommends that the regulator should change its approach to examining the quality of component audit work conducted overseas, on a risk-based basis.
2.2.7.1. This recommended approach makes sense for multinationals where significant components are outside the UK and would provide more insight to the audit quality review team at the FRC/ARGA on the quality of such group audits. It would help improve audit quality.
2.2.7.2. This recommendation does not require legislation.
2.2.8. Recommendation 22: The regulator should revisit and strengthen AQR resourcing, and should seek to: • Recruit more senior staff (including at partner-equivalent level) who would attend AQR inspection visits, adding weight and commanding more substantial respect in conversations with firms; able to make a call on complex matters on-site; and bringing to bear a comparative overview of sector-practice; • Ensure its approach to staffing addresses the need for its teams to include recent experience of external audit and understanding of current practice, in order to test and scrutinise firms as effectively as possible; and • Widen and appropriately deploy the team’s sector expertise, in particular in those most complex and high-risk sectors where public interest and risk of corporate failure is highest.
2.2.8.1. This will help improve audit quality, not least in providing resources to carry out the components of this recommendation but also to ensure resources assess audits and their quality on a more holistic basis and from the perspective of consumers of audits rather than producers of audits.
2.2.8.2. It should not require legislation unless the FRC’s/ARGA’s powers to strengthen AQR resourcing are limited by its answerability on such to BEIS and this needs to be removed.
2.2.9. Recommendation 23: The regulator should be required to promote brevity and comprehensibility in accounts and annual reports, engage meaningfully with users and asset owners about their information needs, and ensure the proportionality and value of reports. At least once in every Parliament, the FRC should report to BEIS a public assessment of the extent to which the statutory reporting framework is serving the interests of the users of company reports together with any recommendations for how it can be improved.
2.2.9.1. This should help improve audit quality because anything that enhances overall company reporting will do so. We believe that the quality of annual reports and financial statements will closely correlate to the quality of an audit, ie the better the annual report and financial statements, the higher the quality of the related audit.
2.2.9.2. This sounds like it may need legislation.
2.2.10. Recommendation 24: The Review recommends that the regulator should consider expanding the volume of CRR activity on a risk-based basis.
2.2.11. Recommendation 25: The Review recommends that the new regulator should be given a power to direct changes to accounts rather than having to go to court.
2.2.11.1. This may improve audit quality for a similar reason to that expressed in 2.2.9.1 above and will require legislation.
2.2.12. Recommendation 26: The Review recommends that CRR findings are reported publicly by the regulator. The regulator should publish full correspondence following all CRR reviews, and the findings should be published in a set timeframe.
2.2.12.1. This may improve audit quality for a similar reason to that expressed in 2.2.9.1 above and should not require legislation.
2.2.13. Recommendation 27: The Review recommends that the new regulator’s CRR work should be limited to PIEs, except to the extent unavoidable under EU law.
2.2.13.1. In the context of this consultation, we have no comments on this recommendation.
2.2.14. Recommendation 28: In addition to stronger retrospective monitoring of company reporting, the Review recommends that the new regulator should introduce a pre-clearance procedure in advance of the publication of accounts.
2.2.14.1. This would help audit quality, especially where the preparer of accounts and the auditor of those accounts cannot agree on an application of a standard, judgement or estimate relating to a material matter.
2.2.14.2. This should not need legislation.
2.2.15. Recommendation 29: The Review recommends that the stronger corporate reporting review process described earlier should be extended to cover the entire annual report, including corporate governance reporting. This should be done on the basis of risk.
2.2.15.1. As stated above at 2.2.9.1, we believe that anything that enhances overall company reporting will also improve the quality of auditing.
2.2.15.2. This should not need legislation.
2.2.16. Recommendation 30: The Government, working with the FCA and the new regulator, should consider whether there is a case for strengthening qualitative regulation around a wider range of investor information than is covered by the FRC’s existing corporate reporting work, to ensure that disciplines to drive up the quality of companies’ disclosures in the UK are at least as demanding as best practice internationally. One possibility would be for the new regulator to trial some additional work in this area, on a risk-based and/or sampled pilot basis; if so, this should be done in close collaboration with (or possibly even in support of) the FCA.
2.2.16.1. This will not improve audit quality. It may need legislation.
2.2.16.2. Also, in our view, this is a recommendation to consider when the quality of overall company reporting, including auditing, has seen significant improvement from the recommendations that are implemented from the three audit reform reviews. Both the Brydon Review and CMA Review recommend a review of the implementation of all three reviews in 2025 and five years respectively and we would suggest this recommendation is incorporated into that review.
2.2.17. Recommendation 31: The Review recommends that the new regulator should be more sparing and disciplined than the FRC in promulgating guidance and discussion documents. These documents should only be issued if they are genuinely useful, and their utility clearly exceeds the considerable costs they impose through users having to read and check them.
2.2.17.1. While this may not be relevant to improving audit quality, we support the recommendation as we can see that any distractions from the new regulator’s core purposes could distract it to the detriment of company reporting and audit quality. There is already evidence that the FRC has taken this to heart. For example, much of the recent guidance on reporting and auditing during the Covid-19 pandemic has been excellent. The way in which it has been kept under review, consulted on with stakeholders like us and updated as necessary has been exemplary.
2.2.18. Recommendation 32: Although the Review is heartened by the FRC’s evident recent change in approach, and by the strengthening of the enforcement team’s resourcing and new leadership of the enforcement function, the Review recommends that both the board and the Government should continue to monitor enforcement performance closely. The new regulator should report on this in its Annual Report, and the regulator should regularly be held accountable by Parliament through appearances at the BEIS Select Committee.
2.2.18.1. This should improve audit quality and does not need legislation.
2.2.19. Recommendation 33: The regulator should revisit its publication policy in relation to concluded cases that result in undertakings.
2.2.19.1. Again, as linked to the above recommendation 32, this should improve audit quality by providing more clarity around the reasons for enforcement actions and their results. This recommendation does not need legislation.
2.2.20. Recommendation 34: The international reach of the regulator’s statutory audit enforcement action should be extended, on a risk-based basis.
2.2.20.1. This would improve audit quality, especially in group audits where component auditors are or relating to companies listed in the UK with headquarters overseas. This may require legislation.
2.2.21. Recommendation 35: The Review recommends that enforcement action against accountants in relation to apparent wrongdoing in Public Interest Entities should be undertaken by the regulator on a statutory basis. The current voluntary scheme should be discontinued and replaced with a new statutory regime with tests and powers aligned and similar to those in the AEP. Those in scope would be judged against the requirements that already apply to them (legislative requirements, financial reporting standards and professional ethical standards).
2.2.21.1. This would help improve audit quality by ensuring that accountants fall under a similar statutory investigation, enforcement and sanctions regime as auditors and, as the recommendation states, requires legislation.
2.2.22. Recommendation 36: The Review recommends that the Government, working with the new regulator, should task the regulator to develop detailed proposals for an effective enforcement regime in relation to Public Interest Entities that holds relevant directors to account for their duties to prepare and approve true and fair accounts and compliant corporate reports, and to deal openly and honestly with auditors. The Review recommends that this should apply to: a company’s CEO, CFO, chair, and audit committee chair.
2.2.22.1. This will improve audit quality for the same reason mentioned at 2.2.9.1 above as it should hold relevant directors to account for matters underpinning the quality of annual reports including financial statements. Although there are some components already in company law, such as s501 of the Companies Act 2006, it will need legislation
2.2.23. Recommendation 37: The Review recommends that the regime for non-member directors should follow the principles of the Audit Enforcement Procedure, with the same threshold for action to be taken, and a graduated range of sanctions. To achieve this, the regulator should set out relevant requirements or statements of responsibilities in relation to auditing and corporate reporting in order that directors are individually accountable for their roles.
2.2.23.1. This would help improve audit quality by ensuring that all relevant directors and not just accountants fall under a similar statutory investigation, enforcement and sanctions regime as auditors. It will require legislation.
2.2.24. Recommendation 38: Although the regulator should be able to impose a range of sanctions, the Review recommends that action relating to director disqualification should continue to rest with the Insolvency Service. The Review does, however, recommend that the FRC should have the necessary powers to investigate directors and refer cases to the Insolvency Service, working closely with them to ensure effective action is taken where necessary.
2.2.24.1. This will underpin recommendations 35 to 37 above and should be considered in conjunction with them.
2.2.25. Recommendation 39: The regulator should continue to operate its oversight role of the accountancy profession, but with a work programme sufficiently wide and expert to identify any emerging concerns of public interest.
2.2.25.1. This will not necessarily improve audit quality. However, it should be applied also to the audit profession envisaged by the Brydon Review. Legislation will be needed for clarity of the new regulator’s scope and remit.
2.2.26. Recommendation 40: The Review recommends that the Government should put in place a backstop statutory power, requiring action to be taken by a professional body if there was a need in the public interest. The Review recommends that such a power would be activated only if needed and at the regulator’s request.
2.2.26.1. In the context of this consultation, we have no comments on this recommendation.
2.2.27. Recommendation 41: The regulator should replace exchanges of letters with formal memoranda of understanding with each of the UK’s professional accountancy bodies.
2.2.27.1. This should underpin audit quality in so far as such memoranda of understanding make clear where the scope and remit of the regulator over audits begin and end compared to those of the professional bodies. It will also be needed with a professional auditor body as envisaged by the Brydon Review. It should not need legislation.
2.2.28. Recommendation 42: The Review recommends that a fundamental shift in approach is needed to ensure that the revised Stewardship Code more clearly differentiates excellence in stewardship. It should focus on outcomes and effectiveness, not on policy statements. The Government should also consider whether any further powers are needed to assess and promote compliance with the Code. If the Code remains simply a driver of boilerplate reporting, serious consideration should be given to its abolition.
2.2.28.1. We understand that this recommendation has already been progressed by the FRC and we fully support it.
2.2.29. Recommendation 43: The FRC needs to engage at more senior level in a much wider and deeper dialogue with UK investors, including both fund managers and representatives of end investors.
2.2.29.1. We strongly support this recommendation, which envisages a deeper dialogue between the regulator and UK investors on governance, reporting and audit. It also implies a need for greater experience and knowledge of governance, reporting and audit by those UK investors. Engagement will help in achieving this. This will also help audit quality through a gradual improvement in the requirements of audit from an investor perspective and consensus.
2.2.29.2. This does not require legislation, but it requires the regulator to look to the investor community people it engages with and those it employs, who have responsibility for engagement.
2.2.29.3. Our recent experience suggests that the FRC is already taking clear action to implement this recommendation.
2.3. Chapter 3 - Corporate failure
2.3.1. Recommendation 44: The Review recommends that the regulator should develop a robust market intelligence function to identify emerging risks at an early stage, helping to shift its perspective to current and future risks, as well as its existing retrospective focus.
2.3.1.1. We agree that responsibility for corporate failure must always rest, first and foremost, with a company’s directors, as well as to some degree with shareholders. We think also that most if not all corporate failures are well red flagged and that all parties or stakeholders involved in corporates should be required to respond and deal with these red flags appropriately (see Brydon Review paras 16.4 and 16.7 at 1.39 and 1.40 respectively above). This recommendation is like others in this respect and therefore will help audit quality. It does not require legislation.
2.3.2. Recommendation 45: The Review recommends that the Government introduces a duty of alert for auditors to report viability or other serious concerns. The regulator should also take a close interest, and engage with the auditor, in situations where a PIE auditor has parted company with its client outside the normal rotation cycle.
2.3.2.1. This recommendation relates to those made in the Brydon Review at paras 16.4 (see 1.39 above), 16.7 (1.40), 18.1.2 (1.46), 18.1.5 (1.46), 23.0.12 (1.51) and 23.1.2 (1.51) and we have nothing further to add.
2.3.3. Recommendation 46: The regulator needs to be able to act quickly where potentially serious problems are indicated. The Review recommends that the regulator should be able to require rapid explanations from companies about reasonable concerns raised by the regulator.
2.3.3.1. In the context of this consultation, we have no comments on this recommendation except to say that we fully support it.
2.3.4. Recommendation 47: The Review recommends that the new regulator should be able to commission a skilled person review, paid for by the company, in circumstances where there is any significant interest arising from its strategic objective: “To protect the interests of investors and the wider public interest by setting high standards of corporate governance, corporate reporting and statutory audit, and by holding to account the companies and professional advisers responsible for meeting those standards.”
2.3.4.1. In the context of this consultation, we have no comments on this recommendation.
2.3.5. Recommendation 48: The Review recommends that the regulator should have the power to publish the skilled person’s report if it judges that to be in the public interest. Investors would then be able to reach their own conclusions about the company’s conduct and management.
2.3.5.1. In the context of this consultation, we have no comments on this recommendation.
2.3.6. Recommendation 49: In terms of further action that may flow as a result of an inspection, depending on its findings the Review recommends that the regulator should be given powers to: • Require a company to procure additional assurance on the viability statement or any other aspect of company reports and accounts; • Require a company to procure an independent boardroom evaluation focused on particular areas of concern such as a specific examination of the effectiveness of the audit committee; • Notify the company of its view of the risks to financial viability and require a formal response from the board, with a recovery plan if appropriate; or • Order the removal of the auditor or an immediate retendering.
2.3.6.1. In the context of this consultation, we have no comments on this recommendation.
2.3.6.2. We do not believe that recommendations 46 to 49 above will enhance audit quality directly as we expect such instances envisaged by these recommendations will be rare and only needed where the various parties involved in a corporate have not foreseen or reacted appropriately to well flagged serious potential problems.
2.3.7. Recommendation 50: In the most serious cases, the Review suggests it may be appropriate for the regulator to issue a report to shareholders suggesting that the company’s dividend policy should be reviewed, or that they consider the case for a change of CEO, CFO, chair or audit committee chair, or for other strengthening of the board of directors. The Review believes that, where the severity of the facts merit it, the regulator should have the confidence to do this. Decision-making should rest, as now, with boards and shareholders.
2.3.7.1. Our comments at 2.3.6 apply to this recommendation.
2.3.7.2. We support the sentiments of the recommendation that decision making should rest with directors and shareholders.
2.3.8. Recommendation 51: BEIS should give serious consideration to the case for a strengthened framework around internal controls in the UK, learning any relevant lessons from operation of the Sarbanes-Oxley regime in the US. The pros and cons of options for change should be analysed and consulted upon, giving special consideration to the importance of proportionality in relation to the size of the company.
2.3.8.1. This recommendation has been superseded by those in the Brydon Review at paras 13.1.8 and 13.1.11 (see above 1.31 and 1.32) and our comments on those Brydon Review recommendations apply here.
2.3.9. Recommendation 52: The Review recommends that viability statements should be reviewed and reformed with a view to making them substantially more effective; and if they cannot be made more effective, serious consideration should be given to abolishing them.
2.3.9.1. This recommendation is now covered by the Brydon Review recommendations at paras 18.1.2 and 18.1.5 (see 1.46 and 2.3.2 above).
2.3.10. Recommendation 53: The Review recommends that the regulator considers requiring further enhancement to the Independent Auditor’s Report to include “graduated” audit findings.
2.3.10.1. See our comment on the graduated findings recommendation of the Brydon Review at para 17.5.9 (see 1.45.1 above).
2.4. Chapter 4 - The new regulator: oversight and accountability
2.4.1. Recommendation 54: The regulator should submit an Annual Report to Parliament.
2.4.1.1. We agree with the Kingman Review’s conclusion that a higher degree of Parliamentary scrutiny and accountability is warranted and therefore the regulator should submit an Annual Report to Parliament. Where this touches on matters related to maintaining or improving audit quality, it will help do so by requiring a focus on the outcomes looked for in any maintenance or improving audit quality matters.
2.4.2. Recommendation 55: In terms of its internal systems and controls, the Review recommends that the new regulator must apply: • The provisions of Managing Public Money; • The Regulators’ Code, which sets out a clear principles-based framework for how regulators should engage with those they regulate; and • The Public Contracts Regulations regarding procurement.
2.4.2.1. In the context of this consultation, we have no comments on this recommendation.
2.4.3. Recommendation 56: The regulator should actively promote diversity, especially in its work on corporate governance.
2.4.3.1. In the context of this consultation, we have no comments on this recommendation.
2.4.4. Recommendation 57: The Review recommends that: • For the foreseeable future, it would be wise for the regulator not to allow staff, board or committee members ever to work on any regulatory functions relating to a past employer, removing themselves and/or delegating to others as necessary; and • Written declarations for all staff members’ conflicts of interest and financial interests should include proposed mitigations, and record any exercise of management discretion in relation to work undertaken relating to a former employer.
2.4.4.1. This will not enhance audit quality and we believe it is an extreme recommendation that may be a barrier to acquiring the resources and experience needed to regulate the audit profession. Vested interest in or the likelihood of influence by a past employer will decrease over time and there should be a time limit such as five or ten years where it is reasonable to believe that objectivity in relation to a past employee is restored. Sometimes past employees can be their past employers’ worst critics, which can be useful in regulatory oversight, especially if tempered by others providing a counterbalance.
2.4.4.2. Conflicts of interest are likely to be inevitable and need to be fully and openly assessed, managed, disclosed and then appropriately resolved if required on a case by case basis. We recognise that public perception of perceived conflicts may attract noisy negative public relations and detract from a person’s abilities to operate in their role or fulfil their objectives. We would prioritise competence over political correctness, whilst recognising that that if both can be achieved without impacting the other that would be ideal and that trade offs have to be made in practice.
2.4.5. Recommendation 58: The Review recommends that the regulator should establish a procurement policy that adheres to public contracting regulations, and that follows an open tendering process. Its policy should be published, along with a summary of those contracts awarded that are above the Public Contracts Regulation threshold.
2.4.5.1. In the context of this consultation, we have no comments on this recommendation.
2.4.6. Recommendation 59: The Review considers the lack of transparency regarding complaints to be unhelpful and recommends that aggregated data on the trend, nature, and outcome of complaints referred to the FRC be published, as well as information on the speed at which they were dealt with.
2.4.6.1. In respect of complaints relating to audits, this recommendation would help audit quality just through disclosing the issues and how they are resolved.
2.4.6.2. It does not need legislation.
2.4.7. Recommendation 60: The Review recommends that the new regulator should more proactively monitor trends in complaints received by, and regarding, professional bodies, since this provides useful intelligence on the way in which professional bodies are operating. The new regulator should be actively interested in the substance of complaint-handling, especially where it is clear that complaints have merit, and not simply be monitoring process-compliance.
2.4.7.1. In the context of this consultation, we have no comments on this recommendation.
2.4.8. Recommendation 61: Given the complex nature of the issues dealt with by the FRC, the Review recommends that a central team receive, triage, respond, and ensure appropriate action is taken in relation to complaints or complaint-like contact from stakeholders. That team should also develop clear guidance on how complaints will be dealt with, including timelines. Although basic, the review considers these changes necessary to improve the regulator’s credibility.
2.4.8.1. In the context of this consultation, we have no comments on this recommendation.
2.4.9. Recommendation 62: The Review sees no reason why FOI provisions should not apply in full to the regulator’s functions and internal running, and recommends that it is designated as a Public Authority for this purpose.
2.4.9.1. In respect of audit quality, applying the Freedom of Information provisions to the regulator’s functions around audit should support audit quality and we cannot see any significant disadvantages in doing so.
2.4.9.2. This appears to require legislation.
2.4.10. Recommendation 63: The Review recommends that FRC and the new regulator must ensure that their internal procedures and approach to sharing information with external stakeholders, and its procedures to investigate and act on any leaks, are much more robust and effective.
2.4.10.1. In the context of this consultation, we have no comments on this recommendation.
2.5. Chapter 5 - Staffing and resources
2.5.1. Recommendation 64: The Review recommends that the regulator should not be funded on a voluntary basis. BEIS should put in place a statutory levy.
2.5.1.1. This will support audit quality in that the regulator will need the required resources to monitor and enforce audit quality as envisaged by the three audit reform reviews. It will need legislation.
2.5.2. Recommendation 65: The Review recommends that BEIS should agree a new budget, consistent with the Review’s recommendations, working with the new regulator and consulting stakeholders.
2.5.2.1. This will support audit quality in that the regulator will need the required resources to monitor and enforce audit quality as envisaged by the three audit reform reviews.
2.5.3. Recommendation 66: The Review recommends that BEIS should set the regulator’s budget each year, and having consulted, determine the proportions of the levy that will apply to different parties.
2.5.3.1. In the context of this consultation, we have no comments on this recommendation.
2.5.4. Recommendation 67: As set out in Chapter 3, the regulator needs to develop new teams, and should look to recruit analysts, investment experts, economists, and those skilled in corporate law.
2.5.5. Recommendation 68: The Review recommends that the new regulator should develop a staffing and resourcing strategy to achieve the vision set out in this Review. That should include a more diverse approach to hiring. The regulator should also build on the experience of the Financial Reporting Review Panel and, like the other financial regulators, develop a pool of former or retired senior executives and experts – so-called ‘grey panthers’ – to boost its capacity to deploy expertise at short notice.
2.5.5.1. In the context of this consultation, we have no comments on this recommendation. However, as mentioned above at 2.5.1.1, 2.5.2.1 and 2.5.4.1, we recognise the importance of getting resourcing right for the purpose of maintaining and improving audit quality.
2.5.6. Recommendation 69: The Review recommends that the control arrangements on pay for the regulator should mirror those of other financial regulators such as the FCA, PRA and Ofcom which are not funded by the taxpayer. This approach should apply immediately. The new regulator’s budget should be set by Ministers, as should the CEO’s pay, but other pay decisions should be made by the regulator subject, of course, to proper transparency, and within the overall financial budget set by Ministers.
2.5.6.1. In the context of this consultation, we have no comments on this recommendation. However, we recognise the importance of getting the processes on pay right to further the objectives of the regulator, including those for audit. Please also note our concerns raised at 2.1.7 and 2.1.13 above.
2.5.7. Recommendation 70: The Review recommends that the new regulator’s pay arrangements should be set out in the regulator’s legal base, and mirror that of Ofcom. That sets out with clarity that the arrangements for the terms, conditions, and remuneration of staff are a matter of Ofcom’s responsibility. The Office of Communications Act 2002 states that: Schedule (7)(1): “The employees of Ofcom who are not executive members shall be appointed to and hold their employments on such terms and conditions, including terms and conditions as to remuneration, as Ofcom may determine.” The Review recommends that the same wording be used for the founding legislation for the new regulator.
2.5.7.1. Our comments at 2.5.6.1 above applies to this recommendation.
2.6. Chapter 6 - Other matters
2.6.1. Recommendation 71: The Review recommends that the new regulator should be given a competition duty in a stronger form than the “have regard to” formulation recommended by the Competition Commission in 2013 and should follow the model set out in Chapter 6, which is broadly based on the FCA’s competition duty.
2.6.1.1. We do not completely agree with this recommendation as we can see that competition duties may conflict with the main functions of a regulator, as they do for the FCA where the objective of keeping financial services consumers safe may quickly conflict with keeping financial services businesses safe to ensure competition. It may be appropriate, where a competition duty is stipulated, to set out what interests take priority when such conflicts arise.
2.6.1.2. However, having said that, we do recognise that ensuring sufficient competition in the audit market will help underpin audit quality.
2.6.1.3. This will require legislation.
2.6.2. Recommendation 72: In addition to a competition duty, the Review also recommends that the regulator should be given a specific statutory function to keep the statutory audit market under review and to report regularly on market and competition developments. This will need to include reporting on trends in audit pricing, the extent of any cross-subsidy from non-audit work and any implications for the quality of audit.
2.6.2.1. This will help underpin audit quality and needs legislation.
2.6.3. Recommendation 73: The Review recommends giving the regulator the powers it needs to support a competition duty and an ongoing market review function. In particular, it will need powers to require firms to provide audit pricing, cross-subsidy and market share data. The position should be reviewed again following completion of the CMA’s market study to ensure that the regulator has the powers needed to implement or monitor the CMA’s competition remedies and to act on evolving or new competition issues in the future.
2.6.3.1. This will help underpin audit quality and needs legislation.
2.6.4. Recommendation 74: The Government, working with the PRA and TPR, should review what powers are required effectively to oversee regulation of the actuarial profession.
2.6.4.1. We recognise that actuarial regulation seems to have fallen into the FRC’s remit by accident and that it may not therefore get the attention needed in the interests of investors in and consumers of insurance that it should. Therefore, we welcome this recommendation to find a home for actuarial regulation to allow FRC/ARGA to focus on governance, reporting and audit. However, it will be important that FRC/ARGA, the new actuarial regulator, the PRA and the TPR (if neither of these latter two become the actuarial regulator) have a memorandum of understanding on matters where their regulatory duties overlap. This review should also consider the need for accounting and audit quality in the insurance sector.
2.6.5. Recommendation 75: The Review recommends that neither the FRC, nor its successor body, is best-placed to be the oversight body. The PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best placed to take on all the actuarial responsibilities currently vested in the FRC.
2.6.5.1. See our comments on recommendation 74 at 2.6.4.1 above.
2.6.6. Recommendation 76: The Review recommends that the arrangements for local audit need to be fundamentally rethought to ensure that they: • Deliver robust assessment and scrutiny of the quality of all local audit work, with individual reports shared with audit committees and published; • Establish a more appropriate threshold for enforcement action; and, • Bring together in one place all the relevant responsibilities, so a single regulatory body can take an overview.
2.6.6.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of local authority and similar audits to comment.
2.6.7. Recommendation 77: Such a role (regarding local audit) could be taken on by the FRC or its successor body, but the Review recommends that it would be much better undertaken by a separate body that has (or could develop) a deeper expertise in the local audit world. That body should have a different and much more focused remit than the former Audit Commission. It should have a clear objective to secure quality, and should set the relevant standards, inspect the quality of relevant audit work and oversee the relevant professional bodies. It should also take on responsibility for appointing auditors for local bodies and agreeing fees.
2.6.7.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of local authority and similar audits to comment.
2.6.8. Recommendation 78: In the same spirit, the Government should review whether the arrangements now in place for other public sector audits, such as Foundation Trusts, are genuinely robust and effective. It is very unlikely that they are.
2.6.8.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of other public sector audits to comment.
2.6.9. Recommendation 79: Just as the Review recommends public disclosure of AQR findings and gradings in relation to the private sector, the Review recommends that the new regulator’s individual AQR reviews in relation to the NAO should be shared with the relevant audit committee and Parliament, and should be published.
2.6.9.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of other public sector audits to comment.
2.6.10. Recommendation 80: The Review recommends that all financial audits in scope of the NAO should be brought within the audit quality monitoring scope of the new regulator, and not only at the discretion of the C&AG.
2.6.10.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of other public sector audits to comment.
2.6.11. Recommendation 81: In light of the Review’s recommendations on local audit, and those above, the Review recommends that the Secretary of State for Business, Energy and Industrial Strategy should reassess if the FRC remains the most appropriate body to perform the role of Independent Supervisor of Auditors General in respect of statutory audits.
2.6.11.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of other public sector audits to comment.
2.6.12. Recommendation 82: The Review also recommends that responsibility for the local audit “Code of Audit Practice” should be moved to the same body that monitors the quality of local audit work.
2.6.12.1. This sounds like a good recommendation on audit generally, but we have insufficient experience of other public sector audits to comment.
2.7. Chapter 7 – Interim steps
2.7.1. Recommendation 83: An immediate priority task for the FRC and the Government should be to work together to identify and agree a set of measures that should be implemented in the short term ahead of legislative time being available for primary legislation. This interim implementation plan should be published along with a timetable.
2.7.1.1. We recognise that this consultation should help towards an interim implementation plan not just for the Kingman Review but also for the other two audit reform reviews.
3.1. Recommendation 1 – Audit Committee scrutiny (Section 5 of final report)
3.1.1. Summary: Audit Committees should come under greater scrutiny by the new regulator. This should increase accountability of audit committees. It should focus Audit Committees’ selection and oversight of auditors on audit quality, while also mitigating any bias against non-Big Four firms. Recommendations to the Secretary of State - We recommend that the government legislate for the following elements of the remedy: • The regulator should have the power and a requirement to mandate minimum standards for both the appointment and oversight of auditors. • The regulator should have the powers and a requirement to monitor compliance with these standards, including the ability to require information and / or reports from Audit Committees, as well as placing an observer on a Committee if necessary. • The regulator should take remedial action where necessary, by for example issuing public reprimands, or making direct statements to shareholders in circumstances where it is unsatisfied with Audit Committees. The more severe measures proposed by Sir John Kingman might complement our remedy ‘in the most serious cases’. Additional suggestions - This remedy could be complemented through enhancing engagement between Audit Committees and shareholders, for example by implementing recommendations from the BEIS Select Committee on transparency of fees and a requirement on the auditor to present at the audited company’s AGM.
3.1.1.1. This is probably the main CMA Review recommendation that will enhance audit quality while at the same time improving competition and choice by mitigating any bias against non big four firms.
3.1.1.2. It is a pity that the recommended greater scrutiny is by the audit regulator and requires legislation as the greater scrutiny of audit committees had been a recommendation of the CMA’s predecessor in their review of the audit market.
3.1.1.3. This greater scrutiny of audit committees could be improved by shareholders getting more involved in engaging with audit committees and auditors on what they require from auditors of their companies and which auditors the companies should appoint.
3.1.1.4. This recommendation already recognises the related recommendations of the Kingman Review and does not contradict the related recommendations of the Brydon Review.
3.2. Recommendation 2a - Mandatory joint audit and peer review (Section 6)
3.2.1. Summary: This remedy requires FTSE 350 companies to be jointly audited by at least two audit firms, with at least one being a non-Big Four firm. There should be some exceptions, one being that initially the largest and most complex companies instead be subject to periodic audit peer reviews commissioned by the regulator. The aim of the remedy is to ensure both acceptable choice and improved resilience of the audit sector. Recommendations to the Secretary of State - We recommend that the Secretary of State legislate to give the regulator flexible powers to implement a joint audit regime based on further consideration of specific design issues, and adapt it over time. Key elements of the remedy are likely to be as follows. • At least one joint auditor should be a non-Big Four firm. • Most FTSE 350 companies should be required to appoint joint auditors. The regulator should establish criteria on which companies should be exempted, covering the largest and most complex companies; companies with very simple, single-entity accounts such as investment trusts are also likely to need exemption from the requirement. • Any company that would otherwise fall within the scope of the remedy should also be exempt if it appoints a non-Big Four firm as its sole auditor. • Other circumstances for exemption should be limited – for example where all firms outside the Big Four are unable to provide a service. • The introduction of joint audit should be gradual, enabling adaptation over time, as suggested by the BEIS Select Committee; companies should make the transition to joint audit no later than when their next tenders arise (rather than all companies in scope having to make the change immediately), but could do so earlier if they choose. • Other than the existing mandatory rotation requirements, individual audit committees should be free to arrange the respective timings of each joint auditor’s appointment as they see fit. • There should be a presumption that Audit Committees should ensure that the work shares of the two joint auditors are relatively equal, starting with each audit firm ordinarily receiving at least 30% of the audit fee. • No changes should be made to the existing UK audit liability framework, meaning that the joint auditors will have joint and several liability for the engagement. • The regulator should be empowered to adapt this remedy over time, for instance increasing or decreasing the coverage of the joint audit or peer review requirements, or changing the requirements on the balance of fees between joint auditors. We recommend that the regulator should have the power to appoint peer reviewers for a selection of companies that are not included in the joint audit remedy. The main elements of this should be as follows, although as this would be a regulatory tool, the regulator should consider its detailed design further. • The reviewer should not be one of the Big Four, apart from in exceptional circumstances, at the discretion of the regulator; for example if the Audit Committee had already chosen a challenger as its sole auditor. • These should be ‘hot’ reviews, ie in real time, and should report to, and be accountable only to, the regulator. • The peer reviewer should not sign the audit opinion, and should not be liable for the accuracy of the accounts. • The regulator should consider how to select peer review targets, either on rotation or incorporating an element of risk assessment, as is the case with its current quality reviews. • The regulator should consider whether and how to make the results public, alongside its consideration of Sir John Kingman’s recommendation to publish the results of its current quality reviews.
3.2.1.1. We are not fans of this recommendation as we cannot see how it necessarily enhances audit quality. It is very unlikely that shareholders of companies, let alone the relevant FTSE 350 ones selected for joint audits, will accept joint audits. The recommendation is complicated. It is also potentially impractical considering the structure of the UK audit market where there may not be enough non big four firms to provide joint auditors.
3.2.1.2. We accept that the main purposes of this recommendation are acceptable choice and improved resilience of the audit sector and based on the new audit regulator’s consideration of specific design issues and adaptation over time. It should be accepted that this consideration may result in the recommendation being dropped and other simpler and more practical ones replacing it.
3.2.1.3. We understand that the FRC are inclined to favour shared audits rather than joint audits. However, even with shared audits, there will be complexities and practicalities to be dealt with that are not there with sole auditors.
3.2.1.4. With both joint and shared audits there will be an increased risk of something material falling between the gaps where a holistic overview of an audit and connecting its various parts would mitigate against this risk.
3.2.1.5. This recommendation should be left for shareholders to decide. It is important to us that shareholders of companies retain the right to decide who audits their companies, whether sole, joint or shared auditors.
3.2.1.6. Despite the CMA’s rejection, we would also suggest that an alternative remedy would be audit market caps where auditors may not audit more than a certain number of a market segment. For example, if an auditor may only audit 20% of the FTSE 100 or FTSE 250 or FTSE 350, the big four firms would only be able to audit a maximum of 80 or 200 or 280 companies respectively freeing up 20 or 50 or 70 companies respectively for challenger firms. The CMA’s main rejection of this remedy seems to not recognise the fluidity of these market segments with their constituents changing over time and new constituents with challenger firm auditors. This recommendation would be a simpler and more practical remedy for acceptable choice and improved resilience. It may also improve audit quality by driving challenger firms to compete on quality and price with the big four firms.
3.3. Recommendation 2b - Measures to mitigate the effects of the distress or failure of a Big 4 firm (Section 7)
3.3.1. Summary: This remedy aims to preserve choice if a Big Four firm were in distress or approaching failure and ensure that as many as possible of the audit clients of a distressed Big Four firm were transferred to a new firm, a challenger firm, or remain within the same firm while a turnaround was implemented. The regulator should monitor the health of the audit practices and have powers to intervene when necessary. Recommendations to the Secretary of State - We recommend that the regulator should be given the powers to: • obtain the information it needs to monitor the health of audit practices to act as an early warning, including requiring Audit Committees to inform it of upcoming tenders; and • intervene as necessary.
3.3.1.1. In the context of this consultation, we have no comments on this recommendation.
3.4. Recommendation 3 - An operational split between the audit and non-audit practices of the Big Four (Section 8)
3.4.1. Summary: This remedy would require the Big Four to put in place a strong strategic and operational split between their audit and non-audit services practices, including separate governance and strategy, separate accounts and remuneration policies, and no profit-sharing between audit and non-audit. The aim of this is to ensure auditors’ full focus is on conducting high quality audits, without their incentives being affected by the much greater revenue and profits from the non-audit side of the firm. Recommendations to the Secretary of State - We recommend that at this stage the Government put in place an operational split between the audit and non-audit practices of the biggest firms in the UK – initially only the Big Four, but with the regulator able to add other firms in later years when they have grown closer to the Big Four’s size. The regulator should be given the powers to design the specific details of the remedy, and refine it over time. The key elements of the operational split are likely be as follows: • No profit-sharing between the audit practice and the non-audit practice, with audit partner remuneration linked to the profits of the audit practice only. • Separate financial statements for the audit practice, consisting of a profit and loss statement for the audit practice. • Transparent transfer pricing, checked by the regulator, particularly for the use of non-audit specialists on audits. • The audit practice should also include audit-related services, such as various regulatory reporting requirements that regulators regard as being best carried out by companies’ auditors. • A separate CEO and board for the audit practice, populated by a majority of independent non-executives, who should be answerable to investors in audited companies, and to the public interest via the regulator. • The audit board should be responsible for all remuneration and career progression decisions within the audit practice. • The board should conduct an annual general meeting and produce an annual report. • Remuneration and career progression should be strongly linked to audit quality, with the audit board setting and overseeing quality standards. If it proves impossible to complete an operational split that delivers the expected improvements – for example if the firms found ways to erode the separation – a reexamination of the merits of a full structural split in the UK would be necessary. Additional suggestions - In addition to the recommendations above, the government and the regulator could consider introducing a deferred compensation and clawback regime for senior audit staff and partners, in the event the regulator considered it necessary to strengthen the remedy package. Such a measure would further link remuneration to audit quality.
3.4.1.1. Our preference is for a full operational split between the audit and non-audit (consultancy) components of hybrid practices where the decided criteria for such a split is required (see also 3.4.1.4 below). This preference is based on the view that the cultural requirements for a professional audit business are fundamentally different to those that are required for a successful consultancy business. Success in consultancy depends heavily on selling. This in turn requires an ability to build close on-going relationships with the client company. A professional auditor and his/her team need to remain much more detached from the company they are auditing. Their primary task is to serve the interests of the investors – not the company management. It is widely accepted that they should be exercising professional scepticism at all stages in their work. The FRC has stated that they should be inclined to question anything they are told by management rather than to simply accept it. Furthermore, they are not required to ‘sell’. They are normally appointed for a period of up to ten years. We also believe audit firm quality of work will benefit by an operational split because the non audit services or consultancy parts of the firm will no longer be able to cross subsidise the costs of audit enforcement fines and increases in professional indemnity insurance. These costs would be borne by the audit practice only post a split, thus focussing their attention on this cost and its potential impact on partners’ profit/(loss) sharing.
3.4.1.2. We note that the FRC has decided to opt for a ring-fencing of the finances of the two parts of any multi-disciplinary practice so that cross- subsidisation of the audit activity is no longer possible. This is desirable and is a step in the right direction. However, it does not go far enough. It does not address the cultural issues which became very evident with the Conviviality audit by Grant Thornton and also appear to have been prevalent in the Autonomy audit by Deloitte and the BHS audit by PwC.
3.4.1.3. We are also aware of changes to audit requirements that should mitigate against cross selling and subsidisation, such as the recent update of the Ethics Standard. These changes may address some of the cultural issues mentioned in respect of the examples in 3.4.1.2 above. With the new limits on non audit work that may be carried out by auditors and many audit committees banning their auditors from doing non audit work for their companies, if time is allowed, it will be interesting to see whether this improves audit culture and whether non audit areas of a firm will have an adverse impact on that firm’s audits and their quality in the future.
3.4.1.4. The operational split remedy may also want to consider criteria that require such a split that are not just based on the overall size of a firm. For example, it may be more appropriate to have the split where a firm is less dependent on audit than on its non audit services; eg if its revenues or profits from audit are less than 25% of a firm’s overall revenues and profits.
3.5. Recommendation 4 – A five-year review of progress by the new regulator (Section 4)
3.5.1. It will be important to set a specific point at which progress can be reviewed, and the effectiveness of the overall package of remedies assessed. The regulator should be required to do this, for instance five years from full implementation, in addition to its continuing oversight of the implementation and maintenance of the remedies. The BEIS Select Committee also emphasised the importance of such a review. This review should examine the effectiveness of the remedies. It should return to the following questions in particular: (a) The merits of moving to independent appointment of auditors, depending on the effectiveness of the regulatory scrutiny of Audit Committees. (b) The possible need for a structural split between audit and non-audit services, depending on the effectiveness of the operational split, as well as on the level of international engagement in this question. (c) Joint audit will almost certainly take longer than five years to bring the desired effects, but the regulator should consider how to fine-tune the remedy to adapt to market developments, to the extent it has not already done so.
3.5.1.1. We have already commented above on and agree with a five year or 2025 review of any audit reforms suggested by the three audit reform reviews and agreed and implemented in the next year or so.
Delivering Audit Reform Inquiry – Call for evidence – Joint response from UKSA and ShareSoc on behalf of individual investors
Appendix 2 – Detail for third question at 5
1.1. The audit product
1.1.1. 1.Fraudulent reporting by directors is almost always material, by nature if not by size. The detection of material fraud is, and must continue to be, a priority within an audit. Audits must state how they have investigated potential fraud, including by directors. (Paragraph 31)
1.1.1.1. This has been addressed by section 14 of the Brydon Review and see our comments at Appendix 1 1.33 to 1.38 above.
1.1.2. 2.Auditors are required to look ahead. We support work to strengthen the audit of and reporting on the going concern assumption and the viability statement. But we encourage Sir Donald Brydon to go further and explore how to make audits more forward-looking. In particular, Sir Donald should consider how widening the role and scope of audit might give the auditor more opportunities to express forward-looking opinions. (Paragraph 35)
1.1.2.1. We believe it is for directors and not auditors to strengthen their reporting on the future of a company, but it is for auditors to provide assurance to shareholders and therefore other stakeholders on this reporting.
1.1.2.2. We understand the difficulties of reporting on the future as it will always be uncertain and can never be proven. Therefore, any such required reporting should contain a safe harbour for reporting in good faith.
1.1.2.3. We believe that section 18 of the Brydon Review has addressed this recommendation sufficiently and see our comments at 1.46 above.
1.1.3. 3.We recommend that the FRC make graduated findings mandatory. (Paragraph 41)
1.1.3.1. We believe this is not necessary for the reasons stated at 1.45.1 above and because shareholders, if properly engaged with audit committees and auditors, could ask for graduated findings if and where needed.
1.1.4. 4.The broadening of the audit remit would improve the usefulness of the product and the value of the job. Auditors would acquire new skills, employ more of their professional judgement and communicate their views clearly and openly (Paragraph 44)
1.1.4.1. Audits are already useful and valued in that they provide the required confidence in companies, directors and the information reported on by directors, including the financial statements. The main issue is that in some cases audits could be of better quality, including employing more of their professional judgement and communicating their views more clearly and more openly.
1.1.4.2. This conclusion/recommendation should be parked and revisited after the creation of the new corporate auditing profession.
1.1.5. 5.As part of his review, Sir Donald Brydon should consider extending the scope of audit to cover the entire annual report, albeit with different levels of assurance and reporting. Critical areas such as corporate governance and payment practices ought to be subject to a robust assurance process and meaningful reporting by the auditor. Auditors should be encouraged and empowered by the new regulator to speak their mind openly and clearly in audit reports, without fear or favour. They should call out poor management when they see it. If there are barriers to auditors taking on more responsibilities and reporting on them candidly (such as unlimited liability and skills issues), the Brydon Review should include proposals for removing these barriers. (Paragraph 45)
1.1.5.1. We repeat our comments at Appendix 2 1.1.4 here.
1.1.5.2. We believe the Brydon Review has considered this recommendation and concluded, especially under the heading “Avoiding an everything-must-be-audited culture” in section 9 of his report, that widening the scope of audit is not needed, unless required by shareholders, that it needs to be better understood and that its quality needs to be improved. We support this conclusion as we would ask our companies for a wider scope where we thought it was needed.
1.1.6. 6.We believe that requiring auditors to present at the AGM is a good way to generate engagement. This direct dialogue with shareholders would also remind auditors who they are accountable to. It would require them to demonstrate their independence and evidence their willingness to challenge management to a wider audience than the Audit Committee. (Paragraph 51)
1.1.6.1. We support this recommendation as we do those related to it in the Brydon Review. It will be important that such a presentation includes among other things the auditor’s view on whether a company’s s 172 statement is based on observed reality; why the auditor accepted or rejected areas of emphasis requests from shareholders; their endeavours to detect material fraud; their response to warning signs of potential corporate failure; and their views on the company’s accounting records, controls and resilience.
1.1.6.2. It should be recognised that this presentation is needed as part of the AGM proxy voting materials as well as being made at the AGM due to the practical reason that while AGMs of more than one company on any given day will practically mean that shareholders invested in more than one of those companies will not be able to attend all AGMs.
1.1.6.3. Ideally we would like to go further than this recommendation proposes. As an immediate follow-on to the normal AGM there should be a meeting between shareholders on the one hand the auditors and members of the audit committee on the other. The executive directors should probably not be present. Issues covered should include:
1.1.7. 7.Our proposals to make audit more useful and transparent should also increase investor interest in audit matters. Interested investors will be more likely to engage and use their voice to push for continued improvements and greater transparency. But there is a long way to go. We have three recommendations to increase investor engagement. Combined with our proposals to make audits more transparent and useful, we believe that this package will lead to significant and positive engagement from investors. (Paragraph 52)
1.1.7.1. As we mentioned above, audits are already useful. However, we do agree that their transparency could be improved, mainly through a clear articulation of key matters informative to shareholders.
1.1.8. 8.There should be a requirement in the new Stewardship Code for investors and asset owners to consider audit matters. (Paragraph 53)
1.1.8.1. While this is a helpful recommendation, it does not go wide enough as it will exclude non signatories to the Code and it does not include non institutional shareholders.
1.1.8.2. Rather than incorporating this requirement in the Stewardship Code, it would be better to consider the Brydon and Kingman reviews’ recommendations that promote an increase in shareholder engagement on audit matters.
1.1.9. 9.Auditors should make a presentation at the AGM to show how they have challenged management and exercised professional scepticism to underpin their audit opinion, and to raise any major issues. (Paragraph 54)
1.1.9.1. See our comments at Appendix 2 1.1.6.1 and 1.1.6.3 above.
1.1.10. 10.In order to be useful, information must be timely. The FRC and its successor should consider requiring companies to publish the audit report at the same time as results are announced (instead of waiting for the full annual report to be published, which often happens a month later, even though the audit report is ready and signed off before results are announced). (Paragraph 55)
1.1.10.1. We understand that a lot of companies follow the good practice of not releasing their annual results/preliminary announcements until their audits are signed off so that there is minimal risk of the financial statement numbers in the preliminary announcement changing in the annual report. The audit report does not need to be published. There just needs a clear statement with the results/preliminary announcement that the financial statement numbers in the preliminary announcement have been audited or not and, if they have, with any audit report information that may be considered non public and price sensitive before the audit report is published. In any case we believe that this will drive good practice towards annual reports and preliminary announcements being published at the same time as HSBC appear to manage to do.
1.1.11. 11.We support the work that Sir Donald is doing to understand “the origins and perceptions of the expectation gap”. Nevertheless, the expectation gap must not be allowed to mask the serious failure of audit to deliver on its own current terms. If auditors delivered on the existing regime reliably and well, the expectation gap would shrink greatly. The delivery gap is far wider than the expectation gap and that is what must be fixed as soon as possible. (Paragraph 56)
1.1.11.1. We agree with this statement and believe the Brydon Review has addressed this issue.
1.1.12. 12.We also support the fundamental rethink of audit that Sir Donald has been tasked with. As a product, audit should be more useful and forward-looking. A revamped product will make a career in audit more varied, exciting and rewarding. Audit should be as attractive as consulting and be seen that way but should also be much more meaningful in its service to the public interest. (Paragraph 57)
1.1.12.1. We believe the Brydon Review has rethought audit fundamentally. We agree that audit should appear to be more useful. However, it is not yet clear to us that audit should be forward looking except where it is required to provide assurance on a company’s forward looking statements. However, audit’s main purpose should continue to be to establish and maintain deserved confidence in a company, its directors and their reported information, including the financial statements.
1.1.12.2. A career in audit should be varied, exciting and rewarding, not least because of the public good it fosters. For example, good auditing requires a decent understanding of business in general and the finances, governance, controls and records needed.
1.2. Capital maintenance
1.2.1. 13.Compliance with the capital maintenance regime is patchy at best and it is not adequately audited. We recommend that the FRC urgently reminds directors and auditors of their duties relating to the accounts and impose severe sanctions for breaches. Most importantly, auditors must be prepared to challenge management on their accounting of realised profits and distributable reserves. (Paragraph 61)
1.2.1.1. We do not agree with this conclusion but have no problem with the recommendations. We believe that most companies take their capital maintenance regimes seriously and do not distribute dividends or make share buybacks unless they have the spare capital and cash to do so. There may be one or two sectors where the conclusion is more applicable, but this should not tarnish the other sectors and most of corporate UK. This fact notwithstanding, we do have concerns that share buybacks have been abused with shares bought back at high prices in order to increase earnings per share and hence boost directors’ bonuses.
1.2.1.2. The focus should be on the responsibilities of companies, their directors, management and employees and not on auditors.
1.2.1.3. The Brydon Review section 19 deals adequately with this issue.
1.2.2. 14.We are alarmed and disappointed that the FRC has not provided clarity on these fundamental issues, given the potential and actual problems that have arisen. The Government and the FRC should work together to resolve these issues as soon as possible, and produce simple and prudent guidance for companies and auditors to follow. (Paragraph 78)
1.2.2.1. Again, the focus here should be on directors and management getting capital maintenance right and not on auditors.
1.2.3. 15.We recommend that the Government and the FRC urgently produce a clear, simple and prudent definition of what counts as realised profits for the purpose of distributions. We support defining realised profits as realised in cash or near cash. (Paragraph 79)
1.2.3.1. We support this recommendation in so far as it appears that there may be confusion over the meaning of realised profits for the purposes of section 830 of the Companies Act 2006. However, the government and FRC should be careful not to overturn any of the customary factors that companies have been abiding with in most legal distributions.
1.2.4. 16.We reject any legislative change the aim of which is to adapt the law to the accounting standards. Instead, auditors and directors need to be reminded that compliance with the accounting standards does not fulfil all legal obligations, and that the law comes first. We regret that the FRC has failed to clarify this basic point with those it regulates. We recommend that the FRC and its successor vigorously enforce the revised capital maintenance regime. (Paragraph 80)
1.2.4.1. We assume this statement relates only to the subject of whether a distribution is lawful or not, based on whether net realised profits are available or not to do so as envisaged by section 830 and related sections of the Companies Act 2006. In this respect we struggle to see how accounting standards will change the concept of realised profits (as presumably meant by the law) into something else. Therefore, we do not accept this statement as necessary.
1.2.5. 17.We strongly support the Government’s proposal to require companies and auditors to take a more critical look at the valuation of goodwill for the purpose of distributions. We recommend that the Government urgently take steps to tighten the net assets test. (Paragraph 86)
1.2.5.1. We see no reason to tighten section 831 of the Companies Act 2006. However, we recognise that intangible assets are not sufficiently realisable to cover realised profits and should not be used to artificially inflate assets to meet the net asset test for distributions.
1.2.5.2. We are not aware of goodwill being used for this purpose. However, we are aware that some sectors’ regulatory capital requirements may not result in distributions being deferred until such capital is deemed sufficient.
1.2.5.3. We would make an alternative recommendation that some analysis of the net asset test being manipulated artificially, including through the inappropriate application of accounting standards, be undertaken with a view to determining the need to tighten up the net asset test.
1.2.6. 18.The Government cannot unilaterally change the international accounting standards, but it can seek to tighten the law. Stopping imprudent distributions makes companies more resilient and encourages management to think longer term and tackle problems earlier. The principle of prudence should be made explicit in the law and its interpretation. (Paragraph 90)
1.2.6.1. We would suggest that imprudent distributions are rare. We would also suggest that any explicit legal implementation of a prudence principle to stop imprudent distributions should also ensure it prevents excessive prudence and what is commonly called “cookie jar” accounting.
1.2.6.2. International accounting standards are a good thing and have ensured consistent and comparable financial statements from preparers. The UK is in the process of putting in place a UK Endorsement Board to ensure that any international accounting standard is appropriate and meets the relevant criteria for adoption in the UK.
1.2.7. 19.The Government and the FRC should lead international efforts to improve accounting standards. If the Government wants to achieve its ambitions of a Global Britain advancing UK influence and interests, then it should be prepared to spell out how it wants to lead international standards on key sectors such as accounting and audit. (Paragraph 91)
1.2.7.1. In the context of this review, we have no comments.
1.2.8. 20.We recommend that companies be required to disclose the balance of distributable reserves in the annual accounts and break down profits between realised and unrealised. (Paragraph 93)
1.2.8.1. In the context of this review, we have no comments.
1.2.9. 21.A solvency system should complement the revised capital maintenance regime that we recommend, not replace it. We recommend that the Government adopts a complementary solvency-based system in which directors must state that dividend payments will not make the company insolvent or create cashflow problems. (Paragraph 96)
1.2.9.1. While this sounds like a good idea, it will be fraught with all the problems associated with making predictions that are inherently uncertain. Directors may be able to state to their best knowledge and belief at the time they so state that the dividend payment will not make the company insolvent or create cash flow problems but the very next moment this statement will be valueless. There is already a good enough solvency system in the UK where insolvent companies go into administration or liquidation and the Insolvency Service considers the actions and abilities of the relevant directors. This only needs enhancing as envisaged by the audit reform reviews by holding all directors to account for the information they provide shareholders, including their assessment on a company making a dividend payment.
1.3. Separating audit from non-audit
1.3.1. 22.The opaque economics of audit undermine independence, erode trust and stifle competition. Audit can only be transparent and independent when it is fully priced. It will only be fully priced when it is no longer subsidised. Therefore, subsidies must end and audit must stand on its own two feet. We conclude that governance separation does not go far enough on the grounds that it fails to deliver independence and does not end cross-subsidies. (Paragraph 118)
1.3.1.1. We reiterate our preference set out in Appendix 1 3.4.1.1 above for a complete operational separation of the audit and not audit elements of any multi-disciplinary firm where the decided on criteria require. Regardless of concerns about cross-subsidisation we believe that there is a fundamental mismatch between the culture required to develop a successful consultancy business and that required for a professional and independently-minded audit practice.
1.3.1.2. We have also commented above that the new regime of allowable or not non audit services should be shown to meet its objective of mitigating any potential conflicts of interest or compromised independence of audit before any more extreme remedies are introduced.
1.3.2. 23.An economic separation of audit and non-audit is highly desirable. We recommend that the CMA at the very least implements the proposed operational split to achieve the separation of economic interests. (Paragraph 122)
1.3.2.1. See our comments above at Appendix 1 3.4.1 and Appendix 2 1.3.1.
1.3.3. 24.We believe that there is a strong case for independent audit firms. (Paragraph 124)
1.3.3.1. See our comments above at Appendix 1 3.4.1 and Appendix 2 1.3.1.
1.3.4. 25.It is clear that there are well-functioning models of legal separation and audit-only firms. (Paragraph 136)
1.3.4.1. We believe that this is correct and would like to see full operational separation adopted. We are not able to comment on the benefits of legal separation.
1.3.5. 26.We agree with the CMA that “objections to full separation are overstated”. We found the objections against full legal separation to be very weak, as membership of the global network provides an effective avenue to pool resources, access staff and share technologies. We also found well-functioning examples of legal separation and audit-only firms. (Paragraph 139)
1.3.5.1. We agree with this view. This is strengthened by the likelihood that in future audit will require a much wider range of specialist skills than it has in the past. These will almost certainly include IT and cyber security skills as well as skills in auditing environmental and other aspects of the business. These should be developed as specific audit skills rather than skills which are routinely ‘outsourced’ to non-audit parts of multi-disciplinary practices. If outsourcing of these services is a necessity for smaller firms then the service should come from third party businesses that specialise in providing these skills on a specialist audit basis..
1.3.6. 27.On the other side of the equation, legal separation offers benefits on multiple fronts: quality, independence, culture, transparency, trust and to some extent, choice. These benefits of separation are large, and in our judgement, worth incurring significant costs. (Paragraph 140)
1.3.6.1. We are not able to comment on the benefits of legal separation.
1.3.7. 28.We encourage the CMA to aim for full legal separation of audit and non-audit services. The CMA should look to the long term, and not let one-off, short-term implementation costs weigh too much in its calculations. If the operational split is chosen instead, the CMA and ARGA should conduct a review of the arrangements after three years to determine whether the split has ended cross-subsidies and improved culture, independence and transparency. If not, we recommend that the CMA then move to implement a full structural break-up of the Big Four into audit and non-audit businesses in the UK. (Paragraph 141)
1.3.7.1. We agree with this for those firms where the decided on criteria require such separation.
1.4. Fees
1.4.1. 29.We recommend that the FRC and its successor require greater reporting on audit fees, potentially including the disclosure of audit hours, staff mix, and rate per hour. Auditors should also report instances where they have performed additional procedures but have been unsuccessful at increasing their fee. (Paragraph 150)
1.4.1.1. This is dealt with in the Brydon Review para 25.2.5 (see Appendix 1 1.56 above).
1.4.2. 30.We are not confident in relying solely on the integrity of auditors to do the right thing in the face of conflicting interests. We agree with Sir John Kingman that “economics shapes behaviour”, and auditors are no exception. The regulator should aim to align as much as possible the incentives that govern auditors’ behaviour with the delivery of quality. (Paragraph 151)
1.4.2.1. Auditors are required by their qualifications to do the right thing in the face of conflicting interests or lose their reputation for integrity and objectivity. As far as we know, there are already several remedies to ensure this. There may be a question on these remedial powers resting with auditors’ professional bodies rather than the regulator and we believe that the Brydon and Kingman reviews already recommend that the remedial powers should rest with the regulator.
1.4.2.2. The consumers of audits (the shareholders) are supposed to provide the backstop in ensuring auditor integrity by exercising their existing shareholder voting rights on appointments to audit committees, of auditors and in respect of setting auditors’ fees. However, it is clear that this system may not be working well in all cases. Also it has been undermined and weakened by the gradual disenfranchisement of retail shareholders who have been pushed into holding their shares in nominee accounts and, as a result, surrendering their normal shareholder rights and responsibilities to a nominee who has no interest in assuming the role of a steward on their behalf.
1.4.3. 31.Audit must be properly resourced to deliver quality. We have argued that the audit product must improve too. We recognise that many of our recommendations in this report are likely to lead to higher audit prices. This is an acceptable consequence of securing better, more trusted audits. (Paragraph 152)
1.4.3.1. We agree with this conclusion and as shareholders accept that audit fees may rise to ensure they deliver quality but caution that these rises should be challenged to ensure that shareholders are not paying more than is necessary.
1.4.4. 32.We recommend that the FRC and its successor be given more powers over audit fees. We support Sir John Kingman’s proposal that the regulator be given powers to intervene in the interests of quality. To do that well, the regulator needs to better understand the economics of audit. The regulator should also investigate whether the structure of fees is fit for purpose, with the aim of reducing or eliminating economic incentives that work against quality. (Paragraph 153)
1.4.4.1. See our comments at Appendix 2 1.4.1 to 1.4.3 above.
1.5. Ensuring independence, challenge and professional scepticism
1.5.1. 33.It is deeply concerning that many audit committees do not appear to be factoring professional scepticism and challenge into their criteria for selecting auditors and are instead using ‘cultural fit’ as a desirable attribute. Equally worrying is the finding that many audit committees are spending so little time on auditing matters. This questions whether many audit committees are committed to challenging management and to putting in the necessary time to ensure that auditors are as well. (Paragraph 161)
1.5.1.1. We agree with this and hope that the Brydon Review related recommendations and the CMA’s on requiring greater audit committee scrutiny will address the issues mentioned here.
1.5.2. 34.Because of our concerns about the independence of audit committees, their lack of attention to audit and the lack of emphasis they are placing on challenge, we fully support the CMA’s proposed remedy on greater scrutiny. We agree with the CMA and others that sharper oversight of audit committees would help ensure that audits are more independent, able to challenge management and address any bias in favour of the Big Four. It is for the regulator to decide how much intervention and oversight is required to deliver these objectives, both in general and in specific cases. (Paragraph 166)
1.5.2.1. Again, we agree.
1.5.3. 35.If audit quality, choice, resilience and the professional scepticism and independence of auditors remain a problem despite the remedies proposed by the CMA, Sir John Kingman and Sir Donald Brydon, we believe that independent appointment becomes a viable option for reform. We recommend that the regulator and the CMA consider the potential independent appointment of auditors with a view to developing it as a viable remedy if other remedies and reforms fail. (Paragraph 176)
1.5.3.1. We agree with this and have written to former Secretary of State the Rt. Hon Greg Clark urging him to consider carefully Sir John Kingman’s suggestions in his subsidiary report on auditor appointment. A copy of our letter is included at Appendix 3.
1.5.3.2. Whether other remedies and reforms fail and require a potential independent appointment of auditors should be one of the things reviewed in 2025 or five years after the reforms are implemented as suggested elsewhere. The development of this potential viable remedy should also consider keeping shareholders and audit committees involved in the appointment process.
1.5.3.3. However, we agree that independent appointment will be required where companies are unable to find and engage an auditor for whatever reason and a viable remedy should be developed for this as well.
1.5.4. 36.We believe that increasing the frequency of audit rotations will, especially if used alongside a market cap, also encourage challenger firms to enter the FTSE 350 audit market, which will increase choice, competition and resilience. We believe these benefits outweigh any possible increases in costs. We also maintain that ten years will allow an audit firm to gain a good understanding of the companies they audit and would contend that even with a twenty-year rotation, a new audit firm will be required to develop knowledge of the firms they audit and the sectors within which they operate. We recommend that the CMA should revisit increasing the frequency of audit rotations, which should be reduced to seven-year non-renewable terms that can only be terminated in exceptional circumstances. (Paragraph 179)
1.5.4.1. We believe that the increased audit rotation requirements might increase choice, competition and resilience. However, there is a cost and a workload associated with more frequent tendering of the audit contract both for the buyer and the provider. The introduction of a market cap is, in our opinion, a more practical and simpler remedy than joint audits, shared audits or increasing the frequency of audit rotations and should be seriously considered (see Appendix 1 3.2.1.6 above) and tried first.
1.5.4.2. However, we also believe that if it is considered that reform of the audit market is a key objective with the aim of introducing more challenger firms to the market for FTSE 350 audits then it would be better to ‘take the bull by the horns’ and do this using much more direct intervention. This means having a third party (possibly ARGA or another independent body) actively managing the appointment of auditors. This would need to be a collaborative exercise involving companies’ shareholders and audit committees. We understand that the Investment association and others are opposed to this, mainly on the grounds of excluding shareholders being involved in their auditors appointment. However, if shareholders are still involved in the appointment process, this would remove their main objection.
1.5.5. 37.We are persuaded that a “cooling off” period during which non-audit services could not be sold after an audit engagement had ended would remove a major potential conflict of interest for auditors. It would help focus auditors’ minds on audit quality and remove any concern that challenging management or exercising professional scepticism would have adverse financial implications after an audit term ended. This would also be a good option if a full structural split of audit and non-audit services was not adopted. It would also most likely increase challenger firms’ non-audit work, which would allow them to build up experience, expertise and a fee base to develop and invest in audit work. On balance we think a cooling-off period of three years would be optimal in delivering audit independence. We recommend that the CMA seriously considers the benefits of a cooling-off period of three years across which non-audit services could not be offered after an audit engagement had ended. The CMA should see this is a viable option if it does not decide to proceed with a full structural split of audit and non-audit services. (Paragraph 182)
1.5.5.1. We were not aware of this recommendation but concur that it is worth considering in ensuring that audit within a firm remains independent.
1.5.6. 38.The amounts being spent by audit firms for prospective clients seem high and lack transparency, raising significant concerns about whether this undermines auditor independence. Auditors themselves said that part of the current crisis of trust in the audit profession is the perception of conflicts of interest. We are therefore concerned that since the FRC’s policy on hospitality was introduced in 2016 there have already been 35 breaches. We recommend that the regulator tightens the current rules and applies them also to prospective audit clients and requires audit companies to publish details of all hospitality in full. (Paragraph 188)
1.5.6.1. We understand that the FRC have already considered this in their recent update of the Ethics Standard.
1.6. Competition, choice and resilience
1.6.1. 39.The CMA thought further consideration could be given to the use of peer reviews to improve quality by introducing an additional, independent quality check. However, it did not see them as a mechanism to give challenger firms enough experience to become more competitive in tendering for the audits of large companies. We agree. (Paragraph 198)
1.6.1.1. In the context of this consultation, we have no comments.
1.6.2. 40.We share the reservations of many about the utility and impact of joint audits but believe that they have a role to play in increasing the resilience of the market in the medium term. We recommend that joint audits should be piloted in the upper reaches of the FTSE 100 in conjunction with our preferred option of a market cap for the rest of the FTSE 350, which is discussed below. Such audits should include a Big Four and a challenger firm; it should not include two Big Four firms. The new regulator should recommend joint audits where it believes challengers have not yet developed the resources and skills to take on the most complex audits alone but where, working alongside a Big Four firm, they would not affect audit quality. The regulator should monitor the quality of these pilots carefully and draw lessons from them to inform debates on which mechanisms are the most likely to increase competition and choice without damaging quality. Finally, we recommend that if unlimited liability is a significant deterrent to the challenger firms auditing the largest and most complex companies, the CMA should consider how to remove this barrier. (Paragraph 205)
1.6.2.1. See our comments at Appendix 1 3.2 above.
1.6.3. 41.We recommend that because of their strategic importance the Government should examine the auditing of banks to explore whether additional safeguards are required in this sector. (Paragraph 206)
1.6.3.1. In the context of this consultation, we have no comments.
1.6.4. 42.While acknowledging that there are short-term risks to introducing a market cap, we believe that on balance that they are outweighed by the long-term benefits of a more competitive and resilient audit market. We are confident that if the regulator designs, implements and monitors the market cap carefully these risks can be minimised. We recommend that the CMA draws up detailed proposals for the introduction of a segmented market cap offering challenger firms the chance to take up a proportion of audits across the FTSE 350. This should be done on the basis that each firm should have an individual cap to avoid one of the Big Four keeping all of its clients and remaining dominant. We recommend that the CMA develops this proposal together with a pilot of joint audits in the first instance to allow challenger firms to take on some of the more complex FTSE 100 audits. (Paragraph 213)
1.6.4.1. Again, see our comments above, at Appendix 1 3.2. We have concluded that a market cap is a better remedy than joint or shared audits for improving audit market choice and resilience and in turn improving overall audit quality.
1.6.5. 43.We recommend that the CMA works with the regulator to draw up proposals to mitigate the consequences of an audit market failure, especially if it involved one of the Big Four. However, we strongly believe that the CMA should prioritise remedies that enable more challenger firms to enter the FTSE 350 audit market and develop their ability to undertake the full range of audits. (Paragraph 217)
1.6.5.1. In the context of this consultation, we have no further comments.
1.7. Regulation of audit
1.7.1. 44.We agree with the Kingman Review that the Financial Reporting Council has for too long been a weak and ineffective regulator. Though in recent years it has begun to apply higher penalties for audit failures, we believe that it is too late to repair its reputation and credibility. It seemed unwilling to explore major audit failures, such as at HBOS, and reluctant to use sanctions even when it found substandard audits. It was ineffective in seeking the additional powers, statutory underpinning and funding it required to make it truly independent of the industry it was regulating. Its leadership also showed a degree of naivety in not acting on perceptions that it was captured by the Big Four, a suspicion fuelled by its self-perpetuating recruitment processes. On balance, the FRC has contributed to the current crisis of trust in audit and now lacks the credibility to address it. (Paragraph 226)
1.7.1.1. We believe that the current crisis of trust in audit belongs to a few rather than the many as most audits are done properly and carried out to good quality levels as shown by shareholders’ satisfaction in those audits at recurring AGMs. However, there is no room for complacency. There are indications that FRC enforcement investigations are becoming more effective in determining whether audits have failed in their main objective of forming reliable opinions on financial statements. We also believe, like the Brydon Review, that we have let producer led audits happen in the past as it was easier to do so when there were no obvious problems that needed dealing with. We now need to keep the pressure on to progress audit reform for the benefit of the UK economy and shareholders who provide UK equity capital.
1.7.2. 45.We welcome the Government’s commitment to accept the Kingman Review’s recommendations to establish ARGA and its steps to start implementing those recommendations that do not require legislation. We are particularly pleased that the Government has accepted Sir John’s recommendation that ARGA should be fully funded by a compulsory levy on the industry. We also welcome the Government’s decision to replace the FRC’s current leadership. They have lost our confidence and clearly that of the Government and most audit stakeholders. We recommend that current FRC board members should have no meaningful role in the reform process or management of the new organisation. Given concerns about the independence and effectiveness of the FRC, we expect that the Government’s preferred candidate will not be appointed until they have appeared before this Committee and we have reported to the House our opinion. (Paragraph 234)
1.7.2.1. We understand that this recommendation has been met and in the context of this consultation, we have no further comments.
1.7.3. 46.We recommend that ARGA ensures that it has effective procedures and policies in place to encourage whistle-blowers to come forward when they have serious concerns and investigates them fully. (Paragraph 235)
1.7.3.1. We highlight our comments on whistleblowing above at Appendix 1 1.50 and 1.57. We also suggest that regulatory whistleblowing is reviewed to understand better the barriers and how these may be overcome or at least mitigated against.
1.7.4. 47.We welcome the Government’s acceptance of the Kingman Review’s proposals for wider powers to intervene to prevent a significant market failure or lessen its impact if it cannot be averted. We recommend that the Government introduces the necessary legislation in the next session of Parliament. We further recommend that when there has been a major accounting and/or audit failure the new regulator should conduct and publish a swift but comprehensive review of what went wrong to share lessons with the wider audit market. (Paragraph 238)
1.7.4.1. In the context of this consultation, we have no additional comments.
1.7.5. 48.We welcome the Government’s positive response to the Kingman Review’s recommendations on ARGA’s objectives, functions and its more proactive role. This should enable ARGA to become the strong, credible regulator the audit industry needs. (Paragraph 242)
1.7.5.1. See our comments at Appendix 1 2.1 and 2.2 above.
1.7.6. 49.We are deeply concerned that investigations into audit failures are still taking two years and longer. We therefore welcome the Government’s commitment to implement immediately the Kingman Review’s recommendation that the FRC and the Government should closely monitor performance in this area and that ARGA should make this a priority. This will be a key area in which we will hold ARGA to account. (Paragraph 244)
1.7.6.1. We note the example of the recently released report into audit failings by Deloitte at Autonomy related to the audit period 2009 -11, nine to 11 years ago. In the context of this consultation, we have no additional comments.
1.7.7. 50.We welcome the Kingman Review’s conclusion that ARGA should not be a ‘soft regulator’ and the recommendation that ARGA, unlike the FRC, should make full use of the range of sanctions it has at its disposal. We recommend that while ARGA should be proportionate, in the worst cases it should not be shy of imposing tough sanctions, including large fines. (Paragraph 248)
1.7.7.1. We believe this is already happening and has been since the FRC’s review of sanctions.
1.7.8. 51.We welcome the Government’s decision to take forward the Kingman Review’s recommendation that AQRs should be a statutory requirement and be published in full. However, we recommend that AQRs should not be anonymised, even in the first instance. We recommend that AQRs should move beyond process-driven box ticking and offer a robust appraisal of the opinions offered in audits and on the quality of the analysis and evidence used to drive those opinions. This should include reviewing what steps an audit had taken to identify fraud. We also recommend ARGA should as a matter of routine inspect audit firms’ software that records audit files and ensure that it is sound and that the audit trail cannot be tampered with. (Paragraph 252)
1.7.8.1. See our comments at Appendix 1 2.2.6 and 2.2.8. We question whether AQRs are process driven box ticking as the FRC’s annual public AQR reports on the firms do not suggest this. Also, if they were, the results would probably be better than they have been currently presented. As they seem to assess fundamental audit quality, the problems with individual cases of poor quality are being brought to light and have resulted in this clamour for audit reform. We agree, while believing they already do, that AQRs should offer a robust appraisal of the opinions offered in audits and on the quality of the analysis and evidence used to drive those opinions.
1.7.8.2. We also question this idea for the reasons we have given above at Appendix 1 2.2.6 and request that a better way of providing audit quality findings is found by FRC/ARGA. We would be happy as consumers of audits to participate in any consultation process in respect of this.
1.7.9. 52.We welcome the Government’s commitment to consider and consult on the possible introduction of a strengthened framework around internal controls on a similar basis to Sarbanes-Oxley. If adapted to the UK regulatory system, a UK equivalent could make a significant contribution to improving the reliability of financial reporting. (Paragraph 255)
1.7.9.1. In the context of this consultation, we have no additional comments.
1.7.10. 53.We welcome the Government’s acceptance that all company directors, regardless of their professional qualification, should be accountable for their performance and liable to the regulator’s sanctions, including if company reporting falls short of the required standards. (Paragraph 256)
1.7.10.1. We agree with this and hope that appropriate methods are found and implemented to ensure this.
1.7.11. 54.We welcome the Government’s decision to return the registration of auditors to the industry regulator. We recommend that the Government and the regulator explore whether non-accountancy entrants, such as technology firms, could also play a role in the statutory audit market, if audit quality can be assured by rigorous registration, monitoring and enforcement policies. We believe that this could help address competition, innovation and resilience issues. (Paragraph 259)
1.7.11.1. In the context of this consultation, we have no additional comments.
Delivering Audit Reform Inquiry – Call for evidence – Joint response from UKSA and ShareSoc on behalf of individual investors
Appendix 3 - Letter from UK Shareholders’ Association and ShareSoc to the Rt. Hon Greg Clarke, Secretary of State re auditor appointment (see Appendix 2 1.5.3.1)
The Rt. Hon Greg Clark MP
Secretary of State for Business, Energy and Industrial Strategy
Department for Business, Energy and Industrial Strategy
1 Victoria Street
London SW1H OET
February 2019
Dear Secretary of State,
Re Appointment of auditors
We are writing to you on behalf of the United Kingdom Shareholders’ Association (UKSA) and the UK Individual Shareholders’ Society (ShareSoc). Our two organisations represent the interests of private shareholders. In addition to our own members, there are 5 million people who own shares and have investment accounts with platforms in the UK. The Office for National Statistics estimates that individual investors own 12% of the UK stock market by value. In addition to this there are many more who have money invested in shares via funds, pensions and savings products such as employee share ownership schemes.
Sir John Kingman in his letter to you in December 2018 made a very clear recommendation that auditors of Public Interest Entities (PIEs) should in future be appointed by the new regulator which would replace the Financial Reporting Council. He set out his proposals under the heading ‘A different model’.
We believe that Sir John’s proposals for the appointment of auditors make eminently good sense. The current system for appointing auditors has failed miserably. It is riddled with conflicts of interest and effectively creates an unhealthy and inappropriate dependency between the auditors and the executive directors of the client companies. It creates a situation in which there is every incentive for auditors to acquiesce to the blandishments of the executive directors over the presentation of the financial statements and to suspend professional scepticism.
We are most unhappy about the resistance from the Investment Association (IA) and its members to Sir John’s proposals on auditor appointment. The large institutional shareholders have for many years been complicit in going along with a system which patently fails to protect the interests of their customers, the end-investors. Even in cases recently in which there have been serious audit failures, it has been common for the auditors be reappointed at the AGM by an overwhelming majority of votes.
We are particularly concerned that Sir John in his letter to you appears to row back so readily from pressing his case for serious reform in the face of stiff resistance the IA. The fact that the IA is a powerful lobby with a loud voice is not a reason to cave in to its call for retention of the status quo with minor amendments. The time for fiddling around on the periphery is over. Radical change, as suggested by Sir John, is overdue.
Appointment of auditors by a third party with the relevant skills and expertise would, once and for all, break the current link of excessive dependency between auditors and those they audit. It is a change that should not be difficult or costly to implement and would be effective in achieving much greater auditor independence than at present. Auditors are currently appointed for a maximum term of ten years. If, on a trial basis, the Regulator started by managing the appointment of auditors for FTSE 100 companies this would mean an average of ten appointments a year. This should not be a particularly onerous workload for a team of experts. It is low-risk and requires relatively little investment.
We strongly urge you and your Department to consider very seriously the recommendations that Sir John has made. Many of those arguing for minimal change have shown themselves to be very poor stewards of other people’s money. Please do not give in to their Siren voices.
We would appreciate the opportunity to meet with you to share our experiences and observations in more detail.
Yours sincerely,
Peter Parry – Policy Director – UK Shareholders’ Association
Cliff Weight – Policy Director - UK Individual Shareholders’ Society
[1] https://www.frc.org.uk/getattachment/3c124043-70b7-428a-af03-9359b32652e2/Transparency-Reporting-Final.pdf