Audit & Corporate Governance Reforms
The long-awaited white paper proposed by the Department for Business, Energy and Industrial Strategy for reforming Audit and Corporate Governance in the UK in light of corporate collapses and accounting scandals encompassing the likes of Carrilion, Pattiserie Valerie and Thomas Cook has recently been made public. Predicted by us back in October, the new reforms involve a complete overhaul of the profession and is the culmination of multiple reviews including the Brydon and Kingman review.
The rules are set to apply to companies considered to be Public Interest Entities (PIE’s) albeit the scope of this term is yet to be decided and may extend beyond simply public limited companies or those controlled by the state (i.e public sector entities) to include large private companies.
The persistent issue of a lack of competition in audit was highlighted by the fact that 97% of FTSE 350 audits are conducted by the Big 4 (Deloitte, PwC, EY and KPMG). The Competition and Markets Authority (CMA) seeks to reduce this figure through the proposal of “managed shared audits” which would permit challenger firms to audit “meaningful portions” of a corporation’s subsidiaries to provide such firms with better exposure. The final audit opinion should also be more independent given that there is more than just 1 auditor evaluating the accounts resulting in a greater degree of assurance to clients. However the Big 4 will argue about duplication of work and the logistical issues of co-ordinating with auditors from other firms, who may lack the competencies and resources necessary to be at par with the Big 4.
The audit reforms are set to cost businesses a staggering £430m
The scope of an audit is also set to be widened to incorporate the growing importance of ESG. Auditors may soon be required to provide assurance on the non-financial factors encompassing an entity such as levels of greenhouse gas (GHG) emissions and assess the materiality of physical risk as well as transition risk which entities are exposed to.
In addition, the Brydon review supports the need for auditors to actively inspect for fraud rather than simply carrying out sampling to ensure the financial statements provide a ‘true and fair view’. The latter is assumed to hold true so long as financial statements are prepared in conformity with IFRS/FRS/GAAP but loopholes in the books of accounts persist. The separation of whether the accounts are prepared to conform with the applicable financial reporting framework and whether they genuinely provide a true and fair view of the financial performance and position of the entity may provide users with more relevant and faithfully representative information.
Changes to corporate governance involve making directors personally responsible for the accuracy of the financial statements of their entities or else face the heavy fines and being stripped of their ability to act as a director. This has led to to sky-rocketing costs of insurance for directors’ and officers’ liability insurance.
Our Coventry auditors are equipped with the latest suite of analytics and auditing tools to ensure your business’ financial statements show a true and fair view of its financial performance and position. Forget techniques such as sampling, our comprehensive and updated software is able to detect anomalies in your ledgers to flag up potentially erroneous and/or fraudulent activity to protect your directors from facing heavy fines and business from reputational damage. Contact Cheylesmore Accountants today for the best-in-class guidance relating to tax, bookkeeping and accounting related matters.
