In its response to the White Paper on ‘Restoring trust in audit and corporate governance’, the Institute of Directors has today called on the Government to:
- Take time to assess the viability of managed shared audits before widely implementing them
- Create a professional framework for directors
- Ensure that ARGA does not lead to the creation of a prudential regulatory regime
The IoD supports the Government’s desire to reduce concentration in the audit market, but is concerned about the viability of the concept of ‘managed shared audits’ – where FTSE 350 firms would be required to appoint a challenger audit firm to conduct a meaningful proportion of the statutory audit (typically 10-30%).
The IoD is calling on the proposed new regulator, ARGA, to oversee a period of evaluation in which the capacity and willingness of challenger and Big 4 audit firms to work together through managed shared audit is assessed and clarified, with any issues ironed out before extending to the rest of the FTSE 350.
On managed shared audits, Dr Roger Barker, Director of Policy and Corporate Governance, commented:
“We support the desire of the Government to address recent failings in audit and governance. However, as firms look to focus on recovery as we come out of the pandemic, we feel that it is right that the proposals are phased in over a longer period of time than currently envisaged.
“We are particularly worried about the willingness and capacity of smaller challenger audit firms to take on major audits in partnership with the Big 4. This is a step into the unknown, and the concept needs to be properly tested before it is rolled out.”
In order to ensure that the reforms are associated with improved underlying behaviour, rather than simply box ticking, there is a clear need for a ‘professional framework for directors’ to be introduced alongside the regulatory changes, encompassing a code of conduct and professional development requirements.
On the professionalisation of directors, Dr Roger Barker said:
“It is essential that directors fulfil high standards in terms of competence, integrity and accountability.
“A professional framework for directors, such as that provided by the Chartered Director qualification, would ensure that board members have understood and mastered the complexities of their ever more challenging role. It would also provide a bridge into the boardroom for talented individuals from a more diverse range of professional backgrounds.”
The IoD supports the creation of ARGA, as a robust replacement for the Financial Reporting Council. However, it is important that ARGA does not lead to a prudential regulatory regime with an excessively intrusive approach to the oversight of boards of directors.
On the creation of ARGA, Dr Barker said:
“Whilst we welcome the creation of ARGA, it must not cross the line into becoming a fully-fledged prudential regulator as established in the banking and financial sector. Public Interest Entities are important components of the UK economy, but they should never be viewed as too big to fail.
“Finding the right balance between maintaining high standards of corporate behaviour whilst at the same time permitting longer-term market forces to operate will be a key judgement for the ARGA leadership.”