ShareSoc and the UK Shareholders Association made a joint submission in a massive 77 page response to the BEIS consultation “Restoring trust in audit and corporate governance”.
Our full consultation response is here: BEIS-Restoring-trust-in-audit-and-corporate-governance-Joint-response-from-UKSA-and-ShareSoc-1-July-2021
The FCA consultation document can be read here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/970673/restoring-trust-in-audit-and-corporate-governance-command-paper.pdf
- Stakeholder and wider public trust in the credibility of directors’ reporting and the statutory audit has been shaken by a succession of sudden and major corporate collapses which have caused serious economic and social damage.
- We consider that these collapses should not simply be attributed to “a few bad actors.”
- These collapses have highlighted major systemic failings in the current system of corporate governance, reporting and auditing; despite most good actors behaving responsibly and in good faith.
- ShareSoc and UKSA approve of and support the thrust of the proposed changes. The proposals set out in the consultation document should improve the situation, if implemented. However, we believe that in many cases they do not go far enough and point out how they could go further.
The FRC Board and its main committees have been dominated by accountants. This approach has not worked well for shareholders and other stakeholders. ARGA and its main committees must be representative of the users of accounts, the customers. We can no longer as a society afford to have audit being run by accountants for the benefit of accountants.
The share registration system disenfranchises the beneficial owners of shares
British company law is predicated on the model that the registered owner of a share is the sole person who can vote that share. It was developed at a time when share ownership was always evidenced by entries on the register of shareholders and the issue of paper share certificates.
The method of appointing auditors requires radical change
The present vote by shareholders to appoint the audit firm is a legal fiction, and in practice nearly always a “rubber stamp” of the firm recommended by the Board of Directors.
We recommend that for PIEs, the audit firm should be directly appointed by ARGA, with ARGA agreeing the audit fee. Only such radical change can ensure that auditors are motivated solely by the imperative of maximising audit quality and challenging any corporate reporting that they consider deficient. We have no objection to continuing with a confirmatory vote of shareholders, as happens at present.
Change the legal responsibility of directors
We welcome the proposal to give ARGA the power to regulate all directors, not just those who are members of professional bodies. However further changes beyond that are required. ARGA and other regulators should cease fining companies for any reporting or company law failures. Although such a fine is legally paid by the company, its economic cost always falls upon the shareholders, all of whom are innocent, except (possibly some) directors and employees. Fines for misconduct by a company should always be levied on the responsible directors or other responsible third parties.
More legal protection for whistleblowers, regulators, and auditors
A system for significant financial compensation, modelled on that used in the USA, is required to protect whistleblowers in the UK. Furthermore, whistleblowers, ARGA and its staff need stronger legal protections so that any person seeking to challenge ARGA through the courts should be required to prove actual malice on the part of ARGA or individual members of staff.
Auditor resignation statements should be absolutely privileged, alongside a strengthened duty upon auditors to report fully and frankly all the circumstances leading to the cessation of the audit engagement.
Expanding the number of firms capable and willing to audit PIEs
We recommend applying a market share cap to the Big 4 audit firms, initially fairly loose to enable time for adaptation, but with that cap later becoming tighter. This would create a guaranteed market for challenger firms.
Is ARGA the most appropriate body to undertake oversight and regulation of the actuarial profession?
Actuarial regulation seems to have fallen into the FRC’s remit by accident. It may not therefore get the attention that is needed to safeguard the interests of investors in insurance companies and of consumers of insurance. Accordingly, we recommend finding a different home for actuarial regulation to allow FRC/ARGA to focus on governance, reporting and audit.
The PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best placed to take on all the actuarial responsibilities currently vested in the FRC.
Implementation planning, monitoring of progress and funding ARGA adequately.
We stress the need to set goals in terms of outputs that are relevant to end users/customers. The FRC has estimated that the implementation of much-needed reform of annual reporting is likely to be a ten-year project. This seems appropriately pragmatic and requires long-term planning. Government needs to continue to monitor progress and ensure ARGA reports on progress against its goals.
It is vital that ARGA has all the resources it needs in this respect. The consultation talks about the funding of ARGA by statutory levy (a system which many consider unsatisfactory), but there is no discussion of the level of resource that ARGA might require even over a five-year, let alone a ten-year, horizon.