What is ARGA? Brydon makes recommendations for stronger audit regulator
What is ARGA? Brydon makes recommendations for stronger audit regulator
One day after the release of the Brydon report on 18 December, The Queen’s Speech referenced the government’s proposal to create a stronger regulator – ARGA. But what is the government planning, what is ARGA, and what were Sir Donald Brydon’s recommendations for this new regulatory body?
On the 19 December 2019, The Queen delivered the Queen’s Speech to MPs. In it, she outlined the new Conservative government’s priorities for the coming parliamentary year.
Prime Minister Boris Johnson claimed that his programme for government is the “most radical Queen’s Speech in a generation”. As far as the accountancy and audit profession is concerned, he could well be correct.
In the supporting notes to the Queen’s Speech, the government said that it would “develop proposals on company audit and corporate reporting, including a stronger regulator with all the powers necessary to reform the sector”.
“These proposals aim to improve public trust in business, following the three independent reviews commissioned in 2018. It will also help workers employed by a large company in future to know how resilient it is.”
The three reviews referred to in the notes were:
The Independent Review of the Financial Reporting Council, led by Sir John Kingman, published on 18 December 2018;
The Competition and Markets Authority’s study of competition in the audit market, published in April 2019; and,
The Independent Review into the quality and effectiveness of audit led by Sir Donald Brydon, published on 18 December 2019.
The first of the three reviews, led by Sir John Kingman, recommended in December 2018 that the UK’s current accountancy and audit regulator – the Financial Reporting Council (FRC) – should be replaced by a new regulatory body called the Audit, Reporting and Governance Authority (ARGA).
The government confirmed in March 2019 that it backed this proposal, and The Queen’s Speech has confirmed the new government’s plans on following through with this commitment.
Brydon’s ARGA recommendations
The third and final review, a 138-page report authored by Sir Donald Brydon, was released a day prior to The Queen’s Speech, a year-to-the day after the release of the Kingman review, and put forward 68 recommendations to improve the audit industry in the UK.
The report was put together using 120 submissions and several face-to-face stakeholder meetings held by Brydon. He also had the benefit of an advisory board made up of investors, companies and other professionals and an Auditor’s Advisory Group – both of which were constituted to “provide advice and challenge emerging findings and recommendations” to Brydon.
In his report, Brydon highlighted the importance of ensuring that the new regulatory body is established with urgency to take forward his recommendations, and that it is “established with the necessary powers as soon as possible.”
He added: “I do not see ARGA as creating a new regulatory burden but, rather, as envisaged by Sir John Kingman, making effective the role of the regulator.”
Perhaps the most significant recommendation made by Brydon in his report is the separation of the audit profession from accountancy, making it a profession in its own right. He says that ARGA should facilitate the establishment of this new profession, and should be the regulator of it.
Brydon’s report states: “Auditing is too important to be left to an adjunct of another profession: it should be an independent profession in its own right, with its own governing principles, qualifications and standards. At present it is an extension of the accounting profession, whose ethics and (arguably) mindset it largely adopts.
“I recommend that ARGA should facilitate the establishment of a corporate auditing profession based on a core set of principles. ARGA should be the statutory regulator of that profession. In doing so, I recommend that ARGA develops a coherent framework for corporate audit that includes but is not limited to the statutory audit of financial statements.”
Public interest function
It is clear from Brydon’s report that he sees the creation of ARGA as an opportunity to hit the refresh button on audit. By establishing it as a new profession, with its own governing body, the definition of audit and the key responsibilities of an auditor can be officially clarified.
He writes that audit lacks a clear purpose, and that a new definition of this purpose should be adopted and enshrined in company law, with a strong emphasis on audit as a public interest function.
He writes: “To guide all audit conduct, I consider there needs to be a set of clearly understood principles.
“I therefore recommend that the Principles of Corporate Auditing should be established to form an overarching framework governing the behaviour of corporate auditors, and that standards and rules should sit within this framework.
“Anyone authorised as an auditor should have a primary duty to behave in a manner that reflects these principles. I would expect that ARGA would then judge the quality of an audit, in part, as the extent to which the auditor’s work and subsequent report are consistent with these principles.”
He writes that the newly defined purpose should reinforce audit as a “public interest function” that goes further than just demonstrating compliance with laws and rules, but “exists fundamentally to help its users know how confident they can be in the audited information” as well as how trustworthy those who produced that information are.
Throughout the report Brydon has taken an almost philosophical approach to his considerations, and how he sees audit in society.
He often supports his recommendations with quotes, and opens his introduction with the following from Karthik Ramanna’s Building a culture of challenge in audit firms, an independent report commissioned by PwC: “I know of no better system than market capitalism to sustain liberty and create prosperity – and market capitalism cannot function without a robust audit function. If we do not save auditing, we cannot save capitalism.”
The importance of audit as a societal function is entrenched in his recommendations for ARGA, and he wants to see the new regulatory body have more interaction with the audit industry, writing: “Much of the academic work on audit I have reviewed focuses on a holistic approach which recognises the complexity of the environment within which audit sits.
“Here also ARGA could play a positive role in facilitating a stronger interaction between academia, the professional bodies, firms, investors, other users and itself.”
Brydon also cites a comment from an article in The Guardian which highlights the societal impact audit has, which is more than just companies failing, quoting the following: “[The auditors’] failure to spot the fragility of those businesses resulted in the loss of jobs, savings, pensions, and tax revenues.”
He cites this as a summary of why his review was necessary, and this public interest function that he says should be at the centre of audit is not just to save businesses, but to save those who are impacted when they collapse from the fallout.
A look to the future
While the government has said that plans for ARGA to become the new audit regulatory body, whether they will proceed with other recommendations from Brydon’s report remains to be seen – the key one being the separation of audit from the wider accountancy profession.
As reported by Accountancy Age, public reactions from figures in the industry were largely positive towards the report and its recommendations, but it’s undeniable that if implemented, the recommendations could be disruptive to all audit firms, big and small. The position of these firms may change when directly confronted with such changes.
In his report, Brydon has said that the time for reviews is now over, and that it is now time for legislative and regulatory action.
To assess progress made over the next five years, he recommends: “that there should be an Independent Implementation Review in 2025 to report publicly on the progress made in relation to the recommendations made by each of these three Reviews.”
If his recommendations are implemented, the industry as we know it could look very different by 2025.