UK audit cop upgrades to paper tiger

Carillion

13/03/2019 09:44

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Christopher Thompson
    LONDON, March 13 (Reuters Breakingviews) - Good auditors
should be boring. In Britain the likes of KPMG and PwC have
instead presided over spectacular corporate failures. A new UK
regulator with tougher powers will help, but not very much. 
    The new Audit, Reporting and Governance Authority (Arga)
will replace the much-maligned Financial Reporting Council in
situ for recent humiliating corporate collapses like
construction company Carillion  CLLN.L  and retailer BHS. 
    Although the government has only accepted just over half of
the 83 recommendations made by an independent review led by
Legal & General  LGEN.L  chair John Kingman, Arga will be an
improvement. No-brainer reforms nodded through include
forbidding regulators from vetting their ex-employer, and
registering any potential conflicts of interest.
    The most eye-catching change, however, is for auditors to be
obliged to raise any persistent accounting concerns with the
Arga, under a “duty of alert”. Arga will have discretionary
power to order third-party reviews, paid for by the company,
which could then be published. These could include, for example,
criticism of the CEO, finance director, or even proposing
changes to the company’s dividend policy. 
    That sounds good. But auditors clearly need a stick to
overcome their fear of losing business by being robust.
Unfortunately, there’s little clarity over what happens if bean
counters choose to holster their new-found weapon – the
recommendations vaguely cite “an effective enforcement regime”
against both auditors and company directors. Kingman’s
recommendation that Arga should be able to remove an auditor and
force a company to retender its contract was ignored.
    The FRC’s system of fining auditors based on their size,
including a maximum 10 million pounds sanction for “seriously
poor audit work”, is inadequate: last year it imposed fines
totalling 18 million pounds, small beer compared to bank fines
and given PwC made $13.8 billion in revenue in western Europe in
2018. This system will largely stay in place.
    Anyone hoping for meaningfully better UK auditing will have
to wait for a UK regulatory review into market concentration.
That could forcibly break up the Big Four accountancy group that
also includes Deloitte and EY. If that fails, don’t count on
Arga to take up the slack.
    On Twitter https://twitter.com/CGAThompson
        
    CONTEXT NEWS
    - Britain will create a new regulator to oversee accountants
who check the books of companies as part of reforms in the audit
sector.
    - Business Minister Greg Clark said on March 11 that a new,
more powerful regulator would replace the Financial Reporting
Council (FRC), criticised by lawmakers for being "timid" in its
handling of accountants and too close to the Big Four accounting
firms that dominate auditing – PwC, KPMG, Deloitte and EY.
    - The new watchdog will for the first time have powers to
make direct changes to accounts rather than apply to a court to
do so. It will have duties to protect the interests of customers
and the public, and regulate the biggest audit firms directly.
    - There will also be tougher sanctions in cases of corporate
failure, including powers to require "rapid explanations" from
companies and, in the most serious cases, publish a report about
the company's conduct and management.
    - Clark, who published a consultation paper on implementing
the Kingman review on March 11, said the setting up of new
leadership at the top of the FRC, which will transition into the
new authority, would begin shortly with the recruitment process
for chair and deputy chair positions.
    - For previous columns by the author, Reuters customers can
click on  THOMPSON/ 
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    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Britain to set up new watchdog to police auditors   
 urn:newsml:reuters.com:*:nL3N20Y3LN
Statement    https://www.gov.uk/government/news/audit-regime-in-the-uk-to-be-transformed-with-new-regulator
BREAKINGVIEWS-UK audit reform leaves unfinished business   
 urn:newsml:reuters.com:*:nL8N1YN1HU
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 (Editing by George Hay and Bob Cervi)
 ((Christopher.G.Thompson@thomsonreuters.com; Reuters Messaging:
Christopher.G.Thompson.thomsonreuters.com@reuters.net))