ARGA: The Audit, Reporting and Governance Authority and A Really Great Aim

The King’s Speech – a positive step

On 17 July, King Charles delivered the King’s Speech, outlining the newly-elected Labour government’s priorities for the months ahead. ¹ The speech opened with a strong focus on the Government’s aims for the economy, perhaps unsurprisingly given the last five years which saw the UK’s exit from the European Union, instability in the Conservative Party’s leadership and the impact of the Covid-19 Pandemic.

The second bill to receive mention, in just the third paragraph of the Speech, is the Draft Audit Reform and Corporate Governance Bill. This legislation is set to create a new accounting regulator – the Audit, Reporting and Governance Authority, to replace the existing regulator, the Financial Reporting Council (“the FRC”). The FRC is responsible for regulating audits, accountants and actuaries and sets the UK’s Corporate Governance and Stewardship Codes. ²

The FRC – previous concerns  

Numerous concerns have been raised over the years about the FRC. In April 2018, the Rt Hon Greg Clark, then Secretary of State for Business, Energy and Industrial Strategy, commissioned an independent report into the FRC. Sir John Kingman published his Independent Review of the Financial Reporting Council in December 2018. ³ This followed two major Select Committees accusing it “in the strongest terms, of timidity, a lack of pace and excessive closeness to those it regulates.” ⁴ The Review made a number of findings, of which the following were key:

1. The Council did not start life as a regulator and began its life as a private, not a public body;
2. It has no meaningful statutory base;
3. The FRC’s powers are limited in a number of areas including oversight of regulation of the actuarial profession and local authority audit, and it has failed to make a persuasive case for change;
4. The FRC’s funding is “seriously inappropriate” and is partly funded through a voluntary levy;
5. Coordination with other regulators appears limited and deficient; and
6. There is limited transparency around its work.

The Review recommended that the “FRC should be replaced as soon as possible with a new independent regulator with clear statutory powers and objectives. It should be named the Audit, Reporting and Governance Authority.” ⁵

During its tenure, the FRC has hit firms with record fines for auditing failures.

In June 2018, PriceWaterHouse Coopers faced a £10 million fine (later reduced to £6.5 million) for serious shortcomings in the audits undertaken prior to the collapse of BHS, previously a household name in Britain, in April 2016, leading to thousands of job losses and leaving a pension deficit of more than £570m. ⁶

In May 2024, KPMG was hit with a new record fine of £30 million (later reduced to £21 million) following investigation into the audits undertaken in the period leading up to Carillion’s insolvency in January 2018. This case attracted a significant amount of media attention due to the widespread job losses, which made clear the case for much stricter audit compliance and oversight to prevent the same situation occurring again. ⁷

The previous government – a broken promise

In March 2021, the Government published the white paper Restoring Trust in Audit and Corporate Governance. ⁸ In summary, the consultation document set out

“the steps that the Government proposes to take to give ARGA [Audit, Reporting and Governance Authority] the formal duties, functions and powers it needs to be fully effective. They include new statutory objectives and functions along with a new statutory levy to replace the existing voluntary levy. The Government is also proposing to give the regulator competition powers and new powers to strengthen its corporate reporting review function, its oversight of audit committees and to enforce the corporate reporting duties of directors.”

On 31 May 2022, the Government confirmed its intentions to replace the FRC with a new, stronger regulator – the ARGA. ⁹ It was hoped that the new regulator would

“tackle dominance of ‘Big Four’ audit firms and create a new regulator to reduce the risk of sudden big company collapses, safeguard jobs and reinforce the UK’s reputation as a world-leading destination for investment.”

On 19 July 2023 the Government laid the Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023 before Parliament andpublished an overview of the new draft regulations which would require very large companies to ensure more effective reporting on business resilience and assurance. ¹⁰

However, on 16 October 2023 the Government withdrew the draft regulations. In a press release entitled ‘Burdensome legislation withdrawn in latest move to cut red tape for business’ it stated that the regulations would have resulted in financial costs for companies, however it maintained its intention to establish the ARGA. It was therefore a surprise when primary legislation to establish the ARGA was noticeably absent from the King’s Speech of 7 November 2023.

The Government’s withdrawal of the bill was noted by commentators to have left plans to reform audit and governance standards “in disarray.” ¹¹ The Institute of Chartered Accountants of Scotland branded the Government’s decision to leave the audit and governance reform bill out of the King’s Speech as a “lost opportunity and a huge blow to the interests of UK businesses and the public.” ¹²

New legislation – a step forwards

The commitment in this King’s Speech to bring forward the Draft Audit Reform and Corporate Governance Bill is therefore a welcome move. The CEO of the FRC, Richard Moriarty, is just one of many individuals supportive of the draft legislation:

“The FRC has transformed in recent years into a more robust and effective regulator. But despite this progress, there are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need.” ¹³

“Without these changes we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.”

Other notable individuals endorsing the government’s plans include Alan Vallance, chief executive of the Institute of Chartered Accountants in England:

“Reliable, trusted reporting by companies is fundamental to investor confidence which in turn is key to economic growth and stability. This long-awaited reform will not only reduce the risk of disorderly business failure, but will contribute to the transition to net zero.”

It is hoped that the new legislation will “strengthen audit and corporate governance to provide investors, employees and consumers with greater confidence in the health of UK companies.”

A balance will need to be struck between greater regulation and transparency and the restrictions of ‘red-tape,’ however the Government’s commitment to the strengthening of auditing and corporate governance is most certainly a positive step in the right direction. 

Pic: Hugo Burnand/Royal Household

References

1. https://www.gov.uk/government/speeches/the-kings-speech-2024 ↩︎
2. https://www.frc.org.uk/about-us/ ↩︎
3. https://assets.publishing.service.gov.uk/media/5c1bbe68ed915d7327b92162/frc-independent-review-final-report.pdf ↩︎
4. https://assets.publishing.service.gov.uk/media/5c1bbe68ed915d7327b92162/frc-independent-review-final-report.pdf page 5, para 3 ↩︎
5. https://assets.publishing.service.gov.uk/media/5c1bbe68ed915d7327b92162/frc-independent-review-final-report.pdf  page 9 ↩︎
6. https://www.bbc.co.uk/news/business-51108660 ↩︎
7. https://www.accountancyage.com/2024/05/10/kpmg-faces-severe-repercussions-for-carillion-audit-failures/ ↩︎
8. https://assets.publishing.service.gov.uk/media/60523e338fa8f55d33815605/restoring-trust-in-audit-and-corporate-governance-command-paper.pdf ↩︎
9. https://www.gov.uk/government/news/audit-regime-overhaul-to-help-restore-trust-in-big-business, https://assets.publishing.service.gov.uk/media/6294ab378fa8f5039107d54d/restoring-trust-in-audit-and-corporate-governance-govt-response.pdf  ↩︎
10. https://www.gov.uk/government/publications/new-transparency-over-resilience-and-assurance-for-big-business/corporate-reporting-the-draft-companies-strategic-report-and-directors-report-amendment-regulations-2023 ↩︎
11. https://www.investorschronicle.co.uk/content/53d57b33-df97-594c-bb35-d274419b7c1a ↩︎
12. https://hansard.parliament.uk/Commons/2023-11-30/debates/5D8BDDBE-2A6C-42F6-94DD-A5FCF160D93E/AuditAndCorporateGovernanceReform ↩︎
13. https://www.fnlondon.com/articles/labour-to-push-ahead-with-audit-reform-as-kings-speech-unveils-policy-platform-690f174b ↩︎