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The FRC is set to transition to the new Audit, Reporting and Governance Authority (ARGA) from April 2024

The UK government has long proposed reforms to the audit and corporate governance framework. 

Back in September 2020, Sir Tony Redmond’s Independent review into the oversight of local audit and the transparency of local authority financial reporting had found “serious concerns” regarding the state of the local audit market and regarding the efficiency of audit firms. 

This review also called for a broader effort to enhance corporate transparency and accountability following high-profile corporate collapses and audit failures. 

As a result, the review proposed the establishment of a new regulator to oversee the audit profession — a proposal welcomed by the Government with plans to introduce the Audit, Reporting and Governance Authority (ARGA) in the UK. 

What is ARGA?

Since 2021, ARGA has been proposed to replace the Financial Reporting Council (FRC) as the UK’s audit regulator. 

Accordingly, the new regulator is intended to have enhanced powers and responsibilities, including oversight of the largest audit firms, setting standards for corporate governance, and enforcing compliance with auditing and corporate reporting requirements.

The FRC’s CEO, Sir Jon Thompson said: “These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting.

“While we await Government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve and enhance the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA.”

What is the need for it?

In March 2021, the Government announced its plan to establish ARGA in a white paper titled ‘Restoring trust in audit and corporate governance’. Up to now, the functions within the existing local audit framework are currently delivered by the Financial Reporting Council, (FRC), the Institute of Chartered Accountants for England and Wales, (ICAEW), the National Audit Office, (NAO), Public Sector Audit Appointments Ltd (PSAA) and Smaller Authorities Audit Appointments Ltd (SAAA), alongside the Chartered Institute of Public Finance and Accountancy’s (CIPFA) code of practice on local authority accounting.

But each of these bodies, the Government argued, has been “hampered by both a coherent response to challenges arising and a nimble response to changing imperatives” due to each one having its own organisational objectives. 

The FRC currently regulates local audit and is delegated specific functions, including oversight of the regulation of auditors of local public bodies by Registered Supervisory Bodies, and the oversight and monitoring for audits of significant local public bodies. 

The Government has agreed that ARGA will continue to fulfil this role and, in addition, it will have broader responsibility for the local audit framework, by taking on statutory responsibility for the Code of Audit Practice and associated Auditor Guidance Notes that are currently prepared and issued by the National Audit Office (NAO). 

In addition, the new regulatory body has also been proposed to prevent corporate failures such as  the collapse of Carillion with £7bn of debt in 2018 — and for which its auditor KPMG was fined only at the end of 2023. 

Overview of the new ARGA objectives

According to the White Paper published in 2022, the regulatory principles ARGA will be subjected to are:

• Promoting innovation in statutory audit work, corporate reporting, corporate governance and actuarial work
• Promoting brevity, clarity and usefulness in corporate reporting
• Working closely with other regulators from the UK and internationally
• Anticipating emerging corporate governance, reporting, professional regulation, actuarial or audit risks by being forward-looking and acting proactively where possible

Following the regulatory principles, ARGA will have new powers to hold PIE directors to account if, in reporting, they do not fulfil their statutory duties as well as powers to monitor the audit market and audit firm resilience more effectively and powers to take action to act against regulatory non-compliance. 

In addition, the new regulator will be able to obtain information from companies, accountants, auditors, actuaries and relevant third parties and powers to set minimum requirements for audit committees in relation to the appointment and oversight of auditors. 

The White Paper also set out that ARGA will be required to produce an annual report that is submitted to the Secretary of State and laid before Parliament. The annual report will include reporting on the regulator’s broader regulatory activities, including performance of the regulator’s enforcement function, to enable greater parliamentary scrutiny of the regulator’s work and performance.

The Government stated: “In exercising both the new powers and powers that it will “inherit” from the FRC, ARGA will need to determine if those that it regulates have met their legal and other obligations, for example requirements set by a relevant recognised supervisory body. Where there has been a breach of legal duties or recognised and accepted standards, ARGA will have powers to take action and the types of actions that ARGA will be able to take will depend on the nature and seriousness of the breach in question.”

How will FRC support the transition?

So far, the FRC has welcomed the Government’s response to the announcement and, in July 2022, has published a position paper highlighting how it will ensure a smooth transition. 

Firstly, the FRC has said it will revise the existing codes, standards and guidance to implement reforms. The focus of the revisions will be to provide “additional support” where reporting is weaker, as well as to reflect the wider responsibilities of the Board and Audit Committee for expanded Sustainability and ESG reporting. 

The council will also develop new standards to allow for voluntary adoption ahead of legislation, such as the Minimum Standards for Audit Committees, as well as setting high-level expectations around the future supervision and monitoring activities which will flow from the revisions to existing codes, standards and guidance. 

When will ARGA be implemented?

As the new audit regulator, ARGA will also have the responsibility to hold companies to account and will need statutory responsibilities and powers. In order to do so, the government has set out proposals for the set up of a dedicated local audit unit within ARGA to ensure that it will have sufficient focus and expertise when it becomes system leader for local audit. 

Yet, statutory responsibilities will require the further approval of Parliament and it is so far unclear how much time the process will take.

According to FRC’s latest 2023-26 draft 3-year plan, the planning assumption for ARGA’s start date has been pushed to April 2024.

The intention of the Government remains to create ARGA and equip it with its powers at the “earliest possible juncture”, since many of these factors represent work that ARGA will need to do. The timescale for this and for other legislative measures will depend on the availability of Parliamentary time and on its agreement to the proposals. 

Article from Accountancy Today Sofia Floris

Gen Z talent are more likely to put D&I at the forefront of their job search, with 76% of this age group rating it as a key factor in their choice of organisation

Some 64% of UK finance professionals have rated diversity and inclusivity as a key factor when choosing an organisation to work for, according to ACCA’s latest annual Global Talent Trends Survey. 

While diversity and inclusion (D&I) strategies are nothing new, ACCA has found that they have risen in importance amongst financial talent when it comes to choosing a place to work. This has put the pressure on employers to deliver D&I policies in order to attract and retain the best talent. 

According to the survey, Gen Z talent are more likely to put D&I at the forefront of their job search, with 76% of this age group rating it as a key factor in their choice of organisation. 

ACCA’s research has been backed up by other studies, which also showed that Gen Z is “more principled” than their older counterparts, as working in a diverse and inclusive environment matters more to them than salary.  

However, with an ongoing cost-of-living crisis, some 50% of UK finance professionals are planning to ask for a pay rise within the next 12 months, while a further 49% believe that the best way to secure a pay rise is to leave their current organisation. 

In addition, with 54% of finance professionals expecting their next career move to be external to their current organisation, ACCA has urged employers to embrace this insight and take steps to retain talent.

Without the shoring up of other workplace factors like diversity and inclusion, hybrid working models and mental health support, ACCA believes there is a real risk that employers could face a move of half of their current workforce in the next 12 months.

Gemma Gathercole, strategic engagement lead for England at ACCA, said: “The latest Global Talent Trends report shed interesting light on the situation around the world and at home here in the UK. 

“While the UK is outperforming in some areas such as offering hybrid working and mental health support, it’s clear that D&I policy is a growing factor of importance for finance professionals.”

She added: “Equally important is skills and training. Finding ways to support employers in implementing effective D&I strategies, attracting and retaining diverse talent, and remaining competitive from a salary and job opportunities perspective is something ACCA will continue to support members with through education and policy outreach.”

Corina Duma writes in Accountancy Today

The Public Company Accounting Oversight Board urged companies and investors to pay greater attention to the findings of its annual inspections of audit firms

The Big Four accounting firms have admitted hundreds of violations of regulations in the US that are designed to protect the independence of their audit work, the Financial Times has reported. 

The admissions by PwC, KPMG, Deloitte and EY come after the Public Company Accounting Oversight Board urged companies and investors to pay greater attention to the findings of its annual inspections of audit firms, which are expected to be released in the coming weeks. 

It is understood that US regulators require audit firm staff and their immediate family to make thorough financial disclosures. They also ban employment and financial relationships with audit clients that could impair the firm’s independence. 

According to PwC, it has identified 129 breaches of independence rules, affecting 74 clients. PCAOB inspectors also found a further one themselves, while inspecting audit work in 2022. 

These figures were included in an update to PwC’s audit quality report, which is published on its website. 

Meanwhile, Deloitte revealed in its audit quality report last month that it had told PCAOB inspectors of 129 breaches across 78 clients in 2022 — affecting approximately 3% of its US audits — and 107 across 53 clients in the 2023 inspection cycle.

The Financial Times reported that KPMG is the only Big Four firm not to have stated its figures, which will become public in the PCAOB’s forthcoming inspection reports for 2022. 

A PCAOB spokesperson said: “Auditor independence underpins the integrity of our capital markets and is essential to ensuring investors can trust the financial statements they rely on to make decisions.”

Article from Accountancy Today

Artificial intelligence has been identified as an emerging risk, with gaps in organisational preparedness and audit proficiency, according to new research from Protiviti.

In partnership with The Institute of Internal Auditors (The IIA), Protiviti conducted its 11th Annual Global Technology Audit Risks Survey to understand the impact of technology evolving at an unprecedented pace, and the risks associated with it.

A total of 559 executives and professionals, including chief audit executives and information technology audit directors, completed the online survey.

While only 28% of respondents perceive AI as a significant threat over the next 12 months, it is rated among the most significant risks over the next two to three years. This suggests that while AI may not be perceived as an immediate threat, it is rising rapidly on the risk horizon.

Although AI can provide organisations with advantages like automation and enhanced data analysis, its utilisation can also introduce a new level of complexity and risks that organisations need to address and manage proactively.

Organisations need the talent, now

As AI adoption continues to grow, it represents a latent risk that organisations must start preparing now. Few organisations believe their level of preparedness or proficiency of their technology audit group in handling AI and ML risks are at acceptable levels.

Another growing concern is the talent gap in IT. Companies need to hire talent with a deep understanding of cybersecurity and AI at a time when such talent is scarce.

“Companies with insufficient talent and intellectual capital in areas like cyber and AI will find themselves exposed when these risks become reality,” warns Angelo Poulikakos, Managing Director, Global Leader, Technology Audit and Advisory practice at Protiviti.

IT talent management poses a substantial technology risk concern, primarily because of the ongoing demand for qualified individuals with the required skillset. Amid a long-term talent shortage, those with technology-related skills and talent remain, by fa, the most difficult to locate, recruit and retain, especially for technology audit groups.

Job listings for AI and ML specialists increased by 300%, according to Protiviti’s report, in the past year while other postings for IT roles declining. With this rapid adoption of LLMs and other types of generative AI across most industries comes greater risks.

Cyber security tops the list of concerns

The survey results also reveal that cybersecurity is the top priority for organisations, with nearly 75% of all respondents considering it a high-risk area.

“When it comes to technology challenges, not only are companies facing a wide range of threats, but each of these threats is changing at an alarming rate,” says Poulikakos. He emphasises the importance of conducting frequent internal audits and integrating advanced analytical tools to stay on top of these changes.

Respondents believe next-gen cyber threats post the most significant risk over the next two to three years.

Call to action: Elevating technology audits

The survey report provides key calls to action aimed at assisting IT audit leaders and teams in taking their technology audits to the next level.

These include increasing audit frequency for high-impact areas, maintaining vigilance over well-managed risks, leveraging advanced analytics for deeper insights, and improving organizational preparedness regarding third-party risk management and IT talent management.

Conclusion: The Road Ahead

The 11th Annual Global Technology Audit Risks Survey serves as both a mirror and a roadmap, reflecting the current state of technology risks and guiding technology audit leaders through the challenges and opportunities that lie ahead. As technology continues to evolve, so too must the strategies and tools employed to manage and mitigate the associated risks.

Article from Accountancy Age