The draft Audit Reform Bill is due to go ahead with draft legislation out for consultation in ‘spring 2025’, the government has confirmed, but there will be no quick turnaround on the new regulatory framework.  

A key part of the Bill will be the upgrade of the Financial Reporting Council (FRC) to the Audit, Reporting and Governance Authority (ARGA), which will give the regulator stronger powers and put it on a statutory footing.

Speaking at a conference on audit reform organised by Westminster Business Forum, Matilda Curtis, deputy director, audit reform at the Department for Business & Trade, told delegates: ‘This has been a policy a very long time in the making. Seven years since the Carillion collapse, we are hearing so much consensus on the need to get on with the reforms.

‘We have committed to publishing a draft Audit Reform and Corporate Governance Bill this parliamentary session that will transition the FRC into a properly funded and properly empowered new regulator, to set a new regulatory perimeter, give it enforcement powers to directors who are not professional accountants and give it powers to support competition, quality and resilience in the audit market.

‘The benefit of doing a draft bill is that we welcome extensive scrutiny from all of you as well as from parliament, and so we will look to return it to parliament as a final bill, touch wood.’

However, even with a spring date pencilled in for release of draft legislation, there is still likely to be a long delay until the ARGA is set up.

Once the draft Bill is published, there will be consultation on the final proposals, before the rules are brought into effect. The government is still working to a fluid timetable and does not have a final date in mind for the new regulatory framework.

Curtis added: ‘We certainly do have at least a couple of years to go even on a minimum time frame until the official launch of ARGA, the Audit, Reporting and Governance Authority.’

With a raft of rules under consultation, the government is also aware that it needs to tread carefully to not overburden business with new red tape.

Currently the government is reviewing whether there needs to be greater regulatory oversight of the sustainability assurance market, while it also has to move forward with the UK endorsement of the ISSB sustainability standards, IFRS S1 and S2, as well as plan the implementation timetable.

At the same time, SMEs and micros will face new reporting requirements at Companies House with balance sheet and profit and loss figures becoming mandatory although a final date for this has not been confirmed.

‘There is plenty of development in the wider corporate reporting space,’ Curtis said. ‘We will launch a consultation on non financial reporting which aims to streamline the framework, and we have already laid secondary legislation which will raise thresholds for small and micro and medium company reporting.

‘This is certainly a lot of consultations so we are having a think about how we time that sequence through the year to make sure it is very clear how all that joins together and make sure stakeholders are not overwhelmed with questions from us and things where we want you to respond.’

While the focus is on audit reform and changes to financial reporting, this must not detract from the key government aim of driving growth and not increasing the regulatory burden unnecessarily.

‘It is really important to talk about how we see audit, corporate governance and corporate reporting in the context of the government’s growth mission,’ added Curtis.

‘That is a real top priority for our ministers, to look across the piece about how we can strengthen trust and transparency, market stability, attracting investment and supporting growth, and putting a really firm focus, a strict focus on ourselves on proportionality so that we make sure that both existing and new requirements avoid excessive burdens and that we create a regulatory approach where we, together with the FRC, and then ARGA, support improvement and compliance.’  

Delegates at the conference expressed concerns about the scope of the proposed Bill, the long delay in reform audit, and the rules around director accountability. There was also a view that legislation should not be introduced for the sake of it, as a reaction to scandals such as Carillion, Patisserie Valerie and Thomas Cook.

There was also some resignation about the amount of time it has taken to introduce legislation, although the previous government dropping draft legislation in late 2023.

On director accountability, Curtis said: ‘We hear strong support for taking action, holding directors accountable for what they are already responsible for. I realise there are already some controversial aspects with that and we need to work through very carefully how we do that.

‘There is certainly room for discussion there and it is something that the secretary of state mentioned at the Business & Trade Committee a couple of weeks ago so it is something which is a political priority.

‘There is absolutely space for continued debate on that one, but it might be more on the how, because I think the intention is take that forward.’

Curtis stressed that audit reform was a key issue for the government as well as the business secretary, Jonathan Reynolds, and it will be passed during the current parliament, which is set to run until 2029. But she stressed that it should not be seen as wholesale reform of the audit market, telling the audience that ‘there are three things we are not doing’ in the context of the reforms.

Curtis said: ‘The first thing we are doing is we are not fixing audit as audit is not broken.

‘We are really proud of the audit firms in the UK and the wider professional ecosystem in the UK, our corporate governance, our reporting systems are at least up there with the best in the world, some might say they are the best in the world. It depends how brave I am feeling and how many Americans there are on the call.

‘We do of course want to see improvements in quality and choice, we want to see a more competitive and resilient market but we need to recognise and celebrate what we already have.

‘We certainly wouldn’t want any kind of robust debate on what kinds of reforms we need to get in the way of that, particularly in the context of the industrial strategy as I have mentioned, and the government’s wider priorities.

‘The second thing we are not doing is we are not replacing the Financial Reporting Council – we are upgrading it.

‘The legal foundations of the FRC are clearly not ideal. We need to put it on a proper statutory footing, give it the proper powers which reflect the modern UK economy, but the functions, the leadership, the approach of the FRC will broadly continue under its new name and with its new powers and functions, continuing to work closely with officials and ministers in central government to meet its pro-growth objectives and strike the right balance in its regulatory approach.

‘And the final thing that I want to say that we are not doing, and we have talked about multiple times today, is that we are not preventing failure and we are not removing risk from the market, risk is absolutely inherent to investment and audit does not prevent firm failure.

‘Our objective here is about creating the right incentives for robust corporate governance and reporting, and providing decision useful information to investors, employees, suppliers and other stakeholders, and to limit the impact of disorderly firm failure across the whole of the UK, which brings it back to the two most important words, economic growth.’

The government is also considering a recent FRC market report on sustainability assurance reporting which found ‘significant demand for greater regulatory oversight of the sustainability assurance market’.

Curtis said: ‘We are considering this at the moment so no decisions have been taken, but it is certainly clear to ministers that the draft bill will be an opportunity to take forward any draft proposals that they want to pursue.’

The conference also discussed wider corporate governance issues, while some speakers questioned whether the proposed audit reform would address issues of lack of competition among audit firms for listed audit, and the impact of private equity investment in audit firms and possible conflicts of interest, and the prevalence of the Kingman report in the plans for audit reform, with few proposals for the Brydon report making it through to the final proposals.