At a glance
- The government’s plan to transform the Financial Reporting Council into the Audit, Reporting and Governance Authority (ARGA) won’t increase the compliance burden for small businesses.
- Legislation for the new authority is expected in the first half of this year, with much of the groundwork already completed.
- The regulatory framework includes “proportional” reporting requirements for smaller entities, with stripped-down versions of financial reporting standards designed specifically for micro and SME businesses.
Babington provided an update on the regulatory overhaul during a recent event at the Institute of Public Accountants (IPA) Group that includes the Institute of Financial Accountants (IFA). He said the foundations for the new authority were already in place.
“There was an announcement in the King’s Speech that there is a bill, and the government has committed to introducing it this year to allow it to go through pre-legislative scrutiny,” said Babington, who is also a board member of the International Ethics Standards Board for Accountants (IESBA). “We expect to see a bill introduced in the first half of this year.”
The new regulatory framework aims to enhance audit quality and corporate governance through more rigorous oversight as a means to rebuild public trust in the profession. This follows recommendations from independent reviews that highlighted the need for a stronger regulator with enhanced powers and statutory position.
Babington said much of the groundwork had already been laid, with significant progress has already been made in implementing many of the recommendations.
“A lot of what the FRC has already done has dealt with an enormous number of the recommendations that were made back in 2018 and 2019,” he said. “What is needed now are the final steps to create a statutory vehicle for the regulator to sit in, to put in a statutory funding mechanism.”
Small business compliance requirements to be proportional
Addressing concerns about regulatory burden on smaller entities, Babington said micro and small to medium-sized businesses had reduced disclosure requirements as part of a “stripped down” version of IFRS (International Financial Reporting Standards) reporting. He assuaged fears, assuring that a sense of “proportionality” had been embedded in the framework.
“We have FRS 102 as a stripped down version of IFRS (International Financial Reporting Standards) reporting that’s fit for purpose for small and medium-sized enterprises (SME),” he said. “We have FRS 101 which is reduced disclosures for group components. We have FRS 105 which is for micro entities to report.”
Practitioners working with SME clients will benefit from the UK Government’s recent adjustment of company reporting thresholds that redefines what constitutes micro, small and medium-sized companies. These changes have increased the thresholds and bring more businesses into categories with reduced reporting requirements.
“People need to be aware of what they need to report and how they need to report,” Babington said. “So they can do that seamlessly, but it will create a better, a more consistent environment for them.”
Practical support for practitioners conducting SME audits
The FRC is also developing practical support for practitioners conducting SME audits. “We are working on a project looking at SME audit and how we make that available to businesses at reasonable cost,” said Babington.
For practitioners specialising in sustainability, ARGA will likely play a pivotal role in setting standards. Babington said there’s ongoing work to establish a regulatory regime for sustainability that will likely “mirror what’s there for audit” with standards, inspections and enforcement.
“From a UK perspective, government will consult on a regulatory regime for sustainability, which we expect will mirror what’s there for audit,” he said.
This suggests that accountancy practitioners who upskill in this area could have a competitive edge due to their familiarity with existing assurance frameworks.
Firm culture and governance a strong focus area
Firm culture and governance represent another area of focus that will impact practices of all sizes. Babington said ethical behaviour was determined at leadership level. Leaders that instilled a culture of accountability drove ethical behaviour across an organisation.
For larger practices, there may be increased scrutiny of partnership structures and accountability measures. Babington referenced findings that “sanctions that are levied on a partner are indemnified by the partnership” in some firms, potentially undermining individual accountability.
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