At a glance
- The Auditing, Reporting and Governance Authority (ARGA) is set to replace the Financial Reporting Council (FRC)An effective crackdown on rogue directors will demand stronger controls.
- ARGA will have powers to investigate and sanction directors.
Six years on from Sir John Kingman’s review of the efficacy of the Financial Reporting Council (FRC), landmark legislation which sets out to reshape the corporate governance landscape for accountants and other financial officials and directors has been revived.
In the King’s Speech in July, the incoming Labour administration resurfaced the draft ‘Audit Reform and Corporate Governance Bill’, which is designed to address auditing deficiencies and restore trust in the system by which companies are directed and controlled.
At the heart of the Bill is the government’s goal of transforming the current regulator, the FRC, into the Audit, Reporting, and Governance Authority (ARGA).
Renewed momentum behind reform
For Gordon Macleod, Partner at Forensic Risk Alliance, the draft Bill heralds renewed momentum behind governance and audit reform.
ARGA will have powers to investigate and sanction directors for neglecting their responsibilities, presenting inaccurate accounts or submitting misleading financial statements. These measures are designed to ensure that there are tangible repercussions for directors, deterring misconduct and promoting greater transparency.
Macleod explains: “High-profile collapses such as Carillion, BHS and Patisserie Valerie dented the public’s trust in corporate governance in companies and the reliability of audits and the FRC limited powers meant that it was unable to investigate all the accounting malpractices that came to light in recent years.”
When enacted into law, ARGA will have statutory powers of investigation and enforcement, addressing serious weaknesses identified in the Kingman review. However, adds Macleod, the likely increase in investigations and enforcement activity will take time as the FRC transitions to ARGA and starts to use its new and expanded powers.
“Even once the transition is complete, it remains to be seen whether ARGA will be given sufficient resources to significantly expand the number of investigations of companies, directors, and auditors.”
Give ARGA the right resources
ARGA will have the power to investigate and, if necessary, sanction all directors in breach of their responsibilities – not only those with direct oversight of the financial.
Angela Harrison, audit and accounts partner at accountancy and advisory firm JS, believes the introduction of these statutory powers is a critical and welcome change. She explains: “Ensuring ARGA has the resources and agility to act swiftly is vital. Its role as a strong, independent watchdog should strengthen oversight of audit quality and hold firms accountable where necessary.”
It will be important for Directors to seek advice on how to fulfil their new responsibilities, especially if they are not accountancy or financially trained, says Macleod. “Companies should ensure that the company has an appropriate and reliable control framework in place, if it is not already, which is not only limited to the finance function.”
Macleod adds: “Directors will no longer be able to escape investigation and sanction if they are not a member of a professional body and lack of knowledge will not be a defence.”
Adds Harrison, “While there is some focus on the lack of competition among auditors for large companies, the priority should be on audit quality. This is where ARGA can make the most significant impact.”
A “more robust and effective regulator”
The FRC has said that it welcomes the government’s announcement of draft legislation to modernise its regulatory toolkit and has pledged to work with the Department of Business and Trade.
Claiming to have transformed in recent years into a more robust and effective regulator, the FRC’s CEO, Richard Moriarty, added in a statement: “But despite this progress, there are serious gaps in the regulatory toolkit that have long been identified as being in need of reform, so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need. Without these changes, we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.”
Harrison says that an effective crackdown on rogue directors will demand stronger controls over the appointment process. “Upgraded and transparent information at Companies House is a must, alongside a requirement for directors to formally acknowledge their duties and responsibilities annually. This would help identify and deter silent or nominee directors who contribute little to no oversight.”
She concludes: “The transition to ARGA is an important step, but it must be paired with reforms like extending Public Interest Entity (PIE) status to large private companies. By subjecting these companies to rigorous audits while reducing unnecessary burdens on smaller PIEs, ARGA can encourage trust and investment in major businesses.”
The establishment of ARGA is widely regarded as an important step towards reforming the way directors are regulated. We’re yet to hear of a definite timeline for its launch, but in the lead up it will be vital that the government keeps lines of communications open with businesses and existing regulators, if they are to ensure the new body’s long-term success.
