The Draft Audit Reform and Corporate Governance Bill is set to introduce a new accounting regulator – the Audit, Reporting and Governance Authority (ARGA).
This change is taking place against a wider backdrop of reform to the UK’s audit regulations that seek to counter some of the issues identified by high-profile audit failures in the past.
What is ARGA?
ARGA is the new regulator intended to replace the Financial Reporting Council (FRC), which is responsible for regulating audits, accountants, and actuaries.
As part of the UK Government’s wider efforts to enhance corporate governance and auditing practices, ARGA will oversee audits of public interest entities, ensuring that companies adhere to the highest standards of financial reporting.
This move follows a series of high-profile corporate collapses including BHS, Carillion and Thomas Cook, where audit failures were identified as significant contributors.
What is changing?
With the transition from the FRC to ARGA, numerous changes are being introduced:
Large companies will be under scrutiny
ARGA’s scope is wider than that of the FRC, as it will now cover large private companies – not just those listed on the stock exchange.
Specifically, it will regulate companies with more than 750 employees and an annual turnover of more than £750 million, as well as the audit of listed entities.
This expansion means that large private companies, which were previously outside the regulator’s purview, will now be under ARGA’s scrutiny.
This change highlights the Government’s intent to bring greater transparency and accountability to the operations of the UK’s biggest businesses, regardless of whether they are publicly listed or not.
Breaking the Big Four’s monopoly
One of the key issues ARGA aims to address is the dominance of the Big Four auditors (Deloitte, PwC, EY, and KPMG) in the audit market.
For years, these firms have held a near-monopoly, particularly in auditing the largest listed companies.
So, to foster more competition and improve audit quality, the Government plans to require FTSE 350 companies to conduct part of their audit using a ‘challenger firm’—a smaller audit firm outside the Big Four.
Additionally, companies listed on the FTSE 100 and FTSE 250 will be required to assign part of their audits to smaller firms.
This move is expected to open up the market, providing opportunities for smaller audit firms to compete at the highest levels and bringing fresh perspectives to the audit process.
Simplifying the audit process for smaller businesses
While the reforms introduce more stringent regulations for large companies, they also aim to simplify the audit process for smaller businesses.
The current system typically requires small businesses to prepare accounts with a level of detail only necessary for much larger companies.
These processes can be costly and time-consuming which distract small business owners from their ability to focus on growth and job creation.
The Government have recognised this issue and made the appropriate plans to adjust the requirements to better fit the size and nature of smaller businesses.
By simplifying these rules, the aim is to reduce unnecessary administrative burdens.
However, any change of regulations means that you may need more help in the short term interpreting and understanding the impact of these changes. We are happy to advise if your business wants an opinion before speaking to your current auditor.
Audit thresholds
One of the other changes to be implemented to ease the regulatory burden on business is the announcement of new thresholds for classifying business sizes.
This change has the potential to allow around 132,000 businesses to do away with mandatory audits, giving them more flexibility to focus on their growth and operations.
However, many leading thinkers believe that there is still considerable value for many organisations to conduct regular audits for a wide range of reasons, including risk assessment and demonstration of financial health to third parties, such as investors or other stakeholders.
Often called the third line of defence, audits can be a cost-effective method to preventing losses or extra costs which are less obvious at first sight.
Businesses can expect to experience changes from the threshold reforms for fiscal years commencing on or after 1 October 2024.
The thresholds for classifying micro, small, and medium businesses have been increased:
- Micro businesses: Turnover threshold raised from £632,000 to £1 million, gross assets from £316,000 to £500,000.
- Small businesses: Turnover threshold increased from £10.2 million to £15 million, gross assets from £5.1 million to £7.5 million.
- Medium businesses: Turnover threshold increased from £36 million to £54 million, gross assets from £18 million to £27 million.
Entities exceeding these figures will be classified as large companies.
Employee count thresholds remain at 10, 50, and 250, though the Government is considering increasing the medium-sized enterprise threshold from 250 to 500 employees.
What should businesses do to prepare?
With ARGA’s arrival, businesses should start preparing now.
You should ensure that your governance structures are capable of meeting the new requirements. This may involve re-evaluating the roles and responsibilities of directors and senior management.
If you’re a large company, start discussions with your auditors about how these changes will affect your audit process. For example, you may need to bring in a challenger firm to comply with the new rules.
If you run a smaller business, keep an eye on the evolving guidelines to see how you can benefit from the simplified audit process.
If you would like personalised guidance on how these changes could impact your business, contact our audit experts.