In a statement today, business secretary Greg Clark said that he had asked for a root and branch review of the FRC and “Sir John has duly delivered”.
“The UK has a world leading business environment making us one of the most attractive places to invest, start and grow a business but it is right we continuously keep our corporate governance regime under review to maintain that high competitive standard,” he said.
“The government will take forward the recommendations set out in the review to replace the FRC with a new independent statutory regulator with stronger powers. This body will build on our status as a great place to do business and form an essential part of the government’s continued efforts to grow trust and public confidence in business and the regulations that govern them.”
What the timeline will look like is anyone’s guess given that many of the recommendations require legislation. Working on the basis that the government will need to consult on the proposals, bring forward primary legislation and implement them from the start of the following financial year, April 2020 is probably the earliest point any reforms could take effect. However, there are interim steps that can be taken without the need for recourse to parliament.
The burden of the work to meet these non-legislative recommendations over the coming months will largely fall on the FRC and its staff. However, it is something that FRC chair Sir Win Bischoff said the organisation welcomed.
“Sir John…has addressed the gaps in our powers that have been identified and set a course for a stronger, new regulator to emerge from the FRC,” he commented.
“We welcome Sir John’s recommendations. They have the potential to bring about significant improvements in the work we do in protecting the interests of investors and the wider public.
“We look forward to playing our part to ensure his review is implemented speedily.”
It described the combined proposals from Kingman and the Competition and Markets Authority as “the kind of bold intervention” that it had been calling for.
“We have argued for some time that the natural follow-on to this work should be a fundamental and independent examination of the role of audit itself,” said ICAEW chief executive Michael Izza.
“The expectations of investors and wider society have increased in recent years, and we need to ensure that audit keeps pace.
“We therefore welcome today’s news that Donald Brydon has been asked by the secretary of state to conduct just such a review. Mr Brydon is a very distinguished and experienced business leader, and an excellent choice for this vital project. ICAEW is ready to support him in any way.”
Izza went on to say that ICAEW chartered accountants accepted the need for change and that ICAEW would work with all the parties involved “to produce effective recommendations for regulation and legislation which will improve quality and increase choice in the market, while ensuring that audit meets the future needs of British business and wider society”.
The Kingman recommendation for a new stronger regulator has received a wide welcome. The Investment Association’s CEO, Chris Cummings said he had expressed concern about the FRC’s purpose, mission and culture for a while.
“Forming a new body with a new body, with a new mission and purpose, and making it accountable to parliament was a key recommendation by asset managers, and they will welcome the clarity of responsibilities this new structure brings.
“The expansion of the enforcement regime to all directors will help to ensure that the new body is able to oversee a robust, transparent and complete enforcement process.”
Ian Peters, CEO of the Chartered Institute of Internal Auditors, urged the government to act swiftly to implement Kingman as he believed “radical change is nor urgently required”.
The Local Authority Pension Fund Forum (LAPFF), which has long been a thorn in the side of the FRC, was also delighted with the Kingman and CMA recommendations. “This represents a significant shake-up of the audit market and the way that auditors are regulated.
“The fact that the FRC is to be replaced rather than reformed is essential. It’s difficult to overstate the problems of a regulator that has acted as a private body despite being designated a public body since 1990, and has set standards by writing the key parts of company law down wrongly.
“There will need to be a radical overhaul of FRC technical material.”
The Institute of Directors (IoD) welcomed the tough new approach to audit regulation but expressed concern about the future of corporate governance oversight, IoD head of corporate governance Roger Barker felt that at first glance, the Kingman review seems to suggest outsourcing the role of shareholders to the new body, “which could jeopardise the UK’s effective and collaborative approach to governance”.
“Corporate governance risks being seen as merely a supplement to auditing, when the opposite is true,” he continued. “We need to toughen up audit regulation, but let’s not throw the baby out with the bathwater by reviewing corporate governance as a question of compliance.”
The reaction from the audit profession itself was much more cautious. They recognised the need for a competitive audit sector that works for shareholders, wider society and businesses, and maintains the UK’s position as a leading capital market, but were still working out the implications for their businesses of the draconian changes proposed by the CMA.
As Deloitte senior partner and CEO David Sproul said pointed out, “It’s clear that trust and confidence in the role of the profession is not where it should be and we are supportive of change that enhances audit quality and maintains the competitive position of the UK as we prepare to leave the EU.
“This is a critical moment for the profession in the UK and internationally. The CMA provisional findings, the Kingman review and the announcement of Project Flora offer a unique opportunity to develop an audit market and structure that meets the needs of 21st century stakeholders.
“We will carefully analyse the detail within the CMA proposals and look forward to working with the CMA in conjunction with the findings of the other reviews to develop a world-leading profession in the UK.”
PwC’s chairman and senior partner Kevin Ellis was similarly cautious. “We recognise it is time for change and a watershed moment for the audit sector. Audit quality must be front and centre of any reform. We support measures, which strengthen audit quality, boost public confidence and encourage more choice in the market.
The CMA’s proposals would require careful and wide consultation in order to deliver practical remedies which serve the best interests of shareholders, companies and society at large, he said.
“The UK has a world leading professional services sector and it is important that the CMA, Kingman and other reviews lead to changes which further strengthen confidence and trust in the UK as a place to do business.”
KPMG also welcomed the direction of the Kingman and CMA recommendations. “In our view, a strong and effective regulator should have clarity of purpose, independence and the ability to enforce the rules.
“This is vital for both market participants and the wider economy. All participants in corporate Britain have a responsibility for building trust in business, including the large accountancy firms, UK corporates and regulators. We will review the report in detail when it is published.”
EY said it will support “workable measures that genuinely improve audit quality, strengthen the role of the audit committee and modernise the audit product to meet the expectations of a wide range of stakeholders. EY believes change that addresses these points is necessary to help rebuild society’s trust in business and we will contribute to the consultation to help to achieve this outcome.”
In a statement, Grant Thornton said competition in the UK’s audit market for large companies and PIEs is “not functioning well and we have been clear that change is required.”
“We fully support the objective of reducing concentration in the FTSE 350 audit market and are now considering what the CMA’s proposals mean for our firm and our wider international network.
“We also fully support the objective of ensuring we have a high functioning regulator that is fit for purpose because we believe in the principles of effective and good governance and the consequent benefits on audit quality.”
The firm added, “The vast majority of audits meet the current standards; however the question is now whether these are the right standards. The public perception of audit is weak and failures continue to happen, so we agree that now is the right time to explore what needs to change to ensure that audit is fit for modern day business and meets the public interest.”
Jonathan Ericson, RSM's head of audit, said both reports will have “significant implications for challenger-firms.
He added, “It is clearly in the public interest that there is improved quality and higher levels of competition and choice in the audit market and we applaud the CMA and Sir John Kingman and his team for having worked with such diligence and speed to address these issues.”
Clive Stevens, chairman of the Association of Practicing Accountants, which represents CEOs of mid-tier professional service firms, said, “While measures to encourage new market entrants are welcome any meaningful reform must enable a strong pipeline of challenger firms to scale up over time to take on more of the listed company sector.
“The proposed government review of the definition of a Public Interest Entity should help. We would also like to see the new regulator adopt a more proportionate approach which encourages smaller firms to tender.
“Reform of the current liability regime should also be a priority - it currently acts as a powerful disincentive for mid-tier firms to gain the experience they need to take on larger more complex audits,” added Stevens.
Frank Field MP, chair of the Work and Pensions Committee, said the “historic report” from Kingman “spells the beginning of the end of the cosy club of company directors, auditors and regulators marking their own homework for A* rewards while ordinary workers, pensioners and small businesses pay the price.”
“And the CMA is rowing in behind Sir John with surprisingly bold proposals for breaking up the Big Four and ending the cronyism that sees the same names popping up over and over at every turn like a diabolical jack-in-the-box. If we actually see all this put to effect, we will see the first glimmers of fit-for-purpose corporate governance in the UK,” added the Labour MP.