Developments in governance : On the ball

 

The past year has seen a significant shift in the intensity of debate over the future of corporate governance. A series of high-profile corporate collapses has added to the sense of urgency and further developments in statutory requirements for businesses and providers of external audit services should be expected. The Chartered IIA has, naturally, been watching developments closely and has contributed to all the relevant consultations to promote its message that internal audit is a key element of good corporate governance and of the role that it can play in making significant improvements in future. So what are the key regulatory changes that internal auditors should be aware of and what could these mean for the development of the profession in future?

In the pipeline - things to watch now

Independent Review of the Financial Reporting Council (FRC). The government has said it is adopting about half of the recommendations made by Sir John Kingman in his recent report, including the central recommendation to replace the FRC with a new Audit, Reporting and Governance Authority (ARGA) regulator. This will have new statutory powers intended to enable it to do its job effectively (an element that the Chartered IIA called for in its consultation response). The government recently undertook further consultations on the recommendations it wants to adopt, so expect a  response within the next six months clarifying how it plans to take things forward.

See bit.ly/BEISFRCreview
and bit.ly/FRCconsultation for more details.

Competition and Markets Authority (CMA) Audit Market Study. The CMA has proposed a range of new measures such as the requirement that professional services firms separate their external audit services from their non-audit services by establishing different entities for each type of work, and a proposal for joint external audits, which is intended to help challenger firms undertake statutory audits of premium listed companies. The government has responded to the CMA's proposals by announcing a public consultation that will close on Friday 13 September. See bit.ly/CMArecommendations for details.

The Chartered IIA did not respond directly to the CMA Audit Market Study, since it focused on external audit, but it has commented on it to PA and in its response to the BEIS Committee Future of Audit Inquiry (see below).

 

Recent developments with implications for the future

The Future of Audit Inquiry by the Business, Energy and Industrial Strategy (BEIS) Committee report, published on 2 April 2019. The report included a number of proposed measures including separation of external audit services and non-audit services provided by the same firm, stronger regulation to improve the quality of external audit, and a broader scope for statutory audits. Part of the objective of the inquiry was to maintain pressure for reform, although it does not have the power to enact proposed new policies. The government has yet to respond to the recommendations, but the final report can be found at bit.ly/BEISfutureofaudit and the Chartered IIA’s response is at bit.ly/CIIAfutureofauditresponse

If the government fails to move quickly on audit market reform and to establish the ARGA then you can expect to hear a lot more from the BEIS Committee in the months ahead as it continues to call for swift action.

The new UK Corporate Governance (UKCG) Code came into effect on 1 January 2019. This places greater emphasis on relationships between companies, shareholders and stakeholders than the Combined Code, which it replaced. It promotes the importance of establishing a corporate culture that is aligned with the company purpose and business strategy, promotes integrity and values diversity. All companies with a Premium Listing of equity shares in the UK are required under the Listing Rules to report in their annual report and accounts on how they have applied the code. Visit bit.ly/FRCcorporategovernancecode for details.

The Wates Corporate Governance Principles for Large Private Companies were published on 10 December 2018 and came into effect on 1 January 2019 with the UK Corporate Governance Code. The principles aim to help companies with over 2,000 employees and/or that have a turnover of more than £200m, and a balance sheet of more than £2bn, meet their obligations under The Companies (Miscellaneous reporting) Regulations 2018  to report on their corporate governance arrangements. Visit bit.ly/Watesprinciplesguidance and see Audit & Risk July/August 2019.

The Independent Review into the Quality and Effectiveness of Audit led by Sir Donald Brydon. Although this review focused largely on external audit, the consultation included a range of questions on internal audit and the relationship between internal and external audit. Sir Donald Brydon will issue his report by the end of the year.

 

 

 

 

 

See bit.ly/Brydonconsultation for details. The Chartered IIA’s response to the consultation is at bit.ly/CIIABrydonresponse

 

This article was first published in September 2019.