The government intends to give a new “powered-up” regulator the ability to sanction company directors if deficiencies are uncovered in financial statements.

Sanctions could also extend to failures in relation to an audit committee’s duties in overseeing the work of auditors.

The news came this week in a statement made in the House of Lords during a short debate granted to discuss long-awaited audit reforms.

Government spokesman Lord Leong told the Lords the government intended to push ahead with plans for a new watchdog: the Audit, Reporting and Governance Authority (ARGA).

The King’s Speech in July said the government would publish an audit reform bill, continuing a process begun in 2018 following the collapse of construction giant Carillion.

In this week’s statement to the Lords, Lord Leong (8.19pm) says a new bill “will therefore look to give ARGA powers to investigate and sanction company directors for serious failures in meeting their existing duties and responsibilities relating to accounts, corporate reporting and audit.”

New powers

There has been little detail in the public domain about powers for the new regulator since the current five-year process was launched. But this week’s statement reveals the government’s intentions for new powers and the creation of ARGA, which will grow out of the current regulator, the Financial Reporting Council.

Leong also indicated that work was under way for legislation aimed at improving the market for large audits, currently dominated by the Big Four firms—PwC, KPMG, EY and Deloitte.

There has been some speculation over whether the new government would continue plans for “managed shared audit” as a means of redistributing some audit work to so-called “challenger” firms.

Leong gave no indication whether the specific measures remained in play but said the government “will look to find a balance” between “choice, resilience and quality”.

Leong added: “There are complex choices involved and we expect extensive engagement on these issues.”

In answer to a question from Lord Livingston, Lord Leong said: “We are considering carefully the possible impact of shared audits for any companies, especially listed ones, and changes to the operating structures of audit companies, as part of our policy development on competition, choice and reliance in the market.”

Enforcing minimum standards

There was also an indication from Lord Leong that already-drafted minimum standards for audit committees in the way they commission and supervise audit would become “enforceable”.

The House of Lords’ discussion was triggered by Lord Prem Sikka, a former accountancy professor at the University of Essex, who asked the government for details on its plan for audit reform.

In his speech opening the debate, Lord Sikka expressed concern about the quality of audit available to big companies and their shareholders.

His concern focused on the transparency of audits and the role of the Big Four firms. He suggests that an “independent body” appointing and paying auditors “might give them some backbone”.

“There is an urgent need for transparency about the delivery of audits,” Lord Sikka said during the debate. “This would enable stakeholders to make assessments of the quality of audit and ask focused timely questions. “Currently, we get a glimpse of audit problems only after scandals; if by hook or crook a company survives, poor auditing practices remain buried.”

Lord Leong offered no timetable for the introduction of an audit reform bill.

Last week, it was announced that the Big Four firms had achieved “operational separation” of their audit arms from others services, a key component of recommended reforms, though largely implemented voluntarily.