The UK is set to get a new audit and financial reporting regulator.
The government has announced that the current watchdog, the Financial Reporting Council (FRC), will be replaced with a new organisation named the Audit, Reporting and Governance Authority (ARGA).
Announcing the measure, business secretary Greg Clark said: “This new body will build on our status as a great place to do business and will form an important part of strengthened public trust in businesses and the regulations that govern them.”
The new watchdog will have brand new powers, including a mandate to make direct changes to accounts, rather than go to the courts.
Clark’s decision comes after a report by Sir John Kingman last year, which advised that the FRC should be shut down.
The Kingman Review concluded: “What this spotlight has revealed is an institution constructed in a different era—a rather ramshackle house, cobbled together with all sorts of extensions over time.
“The house is—is just—serviceable, up to a point, but it leaks and creaks, sometimes badly. The inhabitants of the house have sought to patch and mend. But in the end, the house is built on weak foundations.”
The Kingman Review was commissioned by Clark in April last year following heavy criticism of the FRC and its work in relation to monitoring the work of KPMG—auditors of Carillion, the construction giant that collapsed at the end of last year—and Carillion’s financial reporting.
Kingman’s recommendations include that chairs and chief executives of the new body should be subject to pre-approval by MPs on the business select committee of the House of Commons, and the new regulator should not be funded with voluntary donations but through a statutory levy instead.
Kingman also advised that the new regulator should be allowed to remove an auditor or force re-tendering. He also wanted the watchdog to be able to recommend to shareholders “that they consider a change of CEO, CFO, chair or audit committee chair”.
He also recommended that the new regulator might question company strategy. It said: “The review recommends that the new regulator should be able to commission a skilled person review, paid for by the company, in circumstance where there is any significant interest arising from its strategic objective…”
Responding to the government’s announcement, Sir John Kingman said: “As I set out in my review, we need a new audit regulator with a clear and precise sense of purpose and I am pleased that the government shares that vision.”
The FRC’s current chair, Sir Win Bischoff, said in a statement that a “speedy” implementation of the Kingman recommendations would “increase public confidence in audit in the UK”.
A new regulator is not the only change ahead for the audit industry in the UK. The Competition and Markets Authority (CMA) has been running a consultation on the UK’s audit market.
Among its recommendations were to introduce regulation of audit committees to persuade them to focus more on audit quality. The regulations proposed include audit committees reporting directly to the regulator. It also proposed a power for the regulator to issue “public reprimands” for audit committees that have failed to “follow proper procedure”.
The CMA also recommended joint audits and a some form of split between audit and non-audit services inside the same firm.
The CMA audit consultation closed at the end of January. The consultation on the new audit regulator runs until 11 June.