ARGA no more? audit reform paused: what does it mean for auditors

Despite repeated suggestions - across multiple governments and spanning several years - that it was a key priority, the Government has confirmed that plans for audit and corporate governance reforms will not take place during the current parliamentary session. In a letter to the Business and Trade Committee, the Government has set out a clear shift in priorities away from audit reform and focusing instead on economic growth, deregulation, and simpler corporate reporting, blaming parliamentary capacity for the shelving.

This change has important implications for accountants, particularly those working in audit, corporate reporting, and advisory roles.

What were the plans for reform?

Audit reform would have been a large package of changes, to strengthen how audits are regulated, carried out and enforced. In practical terms, this mean replacing the Financial Reporting Council (FRC) with the Audit, Reporting and Governance Authority (ARGA) which would have clearer powers to oversee auditors and company directors.

Auditors will have also faced tougher scrutiny and sanctions, whilst company directors would have had greater responsibility for the accuracy of accounts.

Audit reform aimed to restore trust in the process – so what does that mean for the profession now?

What will happen now?

The headline point is that the long-anticipated audit reform legislation is now firmly on hold. The Government has decided that reform is not a key focus for them in this current economic climate. Whilst acknowledging that there would be benefits to follow through with the reforms (which were first considered in 2018), they have concluded that reform could also lead to an increase in costs, as well as regulatory burden.  This contradicts the Government’s aim to focus on growth.

What this does mean is that there will be continued uncertainty. For several years, the sector has expected reform to be finalised. Indeed, when the current Government came to power, they reiterated that it was a key target for them. Instead, the position continues to remain unclear. Many accountants (and their legal advisers) have been preparing for a more prescriptive and interventionist audit regime. Instead, those longstanding structural issues that have been criticised in the audit market, will remain unresolved in the short term.

A shift toward corporate reporting simplification

Despite this, not all hope is lost. Instead of audit reform, a consultation will be launched later this year, seeking feedback on simplifying and modernising corporate reporting. In our view, this is where accountants will feel the most direct impact. It seems the intention is to reduce complexity, streamlining disclosures, as well as cutting duplication in reporting requirements. This could ultimately mean less box-ticking and more focus on information that is genuinely useful to investors and stakeholders.

Is there still a need for reform?

The Government have also indicated that, in their view, there is less urgency for further audit reform than there once was - the suggestion being that audit quality and oversight have improved significantly. This is driven in part by the work of the Financial Reporting Council (FRC). As such, the FRC will continue to be the central driver of change for the foreseeable future. Rather than adapting to new primary legislation, firms should expect continued incremental regulatory change within the existing framework, including a continued scrutiny of audit quality and firm governance.

One area that remains on the agenda is placing the FRC on a statutory footing. The Government has reiterated its commitment to doing so when parliamentary time allows (how long is a piece of string we hear you ask). The plans to formalise the FRC’s powers are positive – and are perhaps the least that should be expected.

What it means for accountants?

In practical terms, the message for accountants is mixed:

• After years of uncertainty with when reform would take place and what it would mean, there will now be short-term stability in audit regulation, with no immediate legislative overhaul.
• There will be an increased focus on corporate reporting reform, where accountants will be central to shaping and implementing change.
• Continued regulatory pressure from the FRC, rather than from new legislation.
• However, ongoing uncertainty about the longer-term direction of audit reform.

Comment

While the pause may have come as a surprise, it does reduce immediate compliance pressures, but also delays clarity. Accountants and their advisers will need to stay engaged with the upcoming corporate reporting consultation and be ready to adapt - wider audit reform remains on the back burner rather than off the table altogether.