On 2 April 2019, the BEIS Committee published a report following its inquiry into the future of audit setting out its recommendations for audit reform. We discussed the BEIS Committee's inquiry into the future of audit in our Q4 2018 edition at page 5.
Amongst other things, the BEIS has recommended the following:
- Audit product: The detection of fraud should be a priority within an audit and audits must demonstrate how potential fraud has been investigated.
- Audit product: Auditors should be required to present at the AGM in order to generate shareholder engagement.
- Capital maintenance: The U.K. dividend regime should be tightened, and the Government and the FRC should produce a clear, simple and prudent definition of what counts as realised profits as a matter of urgency.
- Capital maintenance: The Government should adopt a complementary solvency-based system in which directors must state that dividend payments will not make the company insolvent or create cashflow problems
- Fees: Greater reporting on audit fees should be required, potentially including the disclosure of audit hours, staff mix, and rate per hour/li>
- Independence: Audit rotations should be reduced to seven-year non-renewable terms that can only be terminated in exceptional circumstances.
- Regulation: Non-financial directors should have greater responsibility for financial reporting.
The report feeds into independent reviews of Sir Donald Brydon into U.K. audit standards (see our Q4 2018 G&SL newsletter, page 7), Sir John Kingman into the FRC (see our Q1 2019 G&SL newsletter, page 13) and the CMA's report into the U.K. audit industry (see our Q4 2018 G&SL newsletter, page 5).
The BEIS Committee report is available here.
On 18 April 2019, the Competition and Markets Authority (CMA) published its final report with recommendations to address competition problems in the U.K. audit industry.
CMA recommends the separation of audit from consulting services, a mandatory "joint audit" to enable firms outside the Big 4 to develop the capacity needed to review the U.K.'s biggest companies, and the introduction of statutory regulatory powers to increase accountability of companies' audit committees.
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