What's on the horizon for audit and accountancy regulation in 2023?

Against a volatile geopolitical and economic backdrop, 2023 is shaping up to be another critical year for the accountancy and audit regulatory landscape. In these interesting and challenging times, what should firms and professionals operating in the accountancy sector expect to see on the horizon for the year ahead?

Audit Reform

The Financial Reporting Council’s (FRC) eventual transition to the Audit Regulation and Governance Authority (ARGA) will likely continue to overshadow accountancy/audit regulation discussions

In its draft three-year plan (2023-2026), the FRC is now assuming that the transition will take place in April 2024, which is significantly later than originally planned. Notwithstanding this delay, the FRC has indicated it will nonetheless re-prioritise to capitalise on changes that can be made with existing non-legislative powers. One such change is the creation of a Minimum Standard for Audit Committees, a draft of which was issued for consultation in November 2022. With an intention to publish before the FY23 end, it is unsurprising that the FRC expects FTSE 350 companies to (voluntarily) bring themselves in line with the Standard sooner, rather than waiting until ARGA’s creation. Another potential change to monitor may be how the FRC implements its additional supervisory powers, in force since 5 December 2022, through the new PIE Auditor Registration regime. Such powers allow the FRC to impose conditions, issue suspensions, and potentially remove registration where it identifies systemic issues in an audit firm.

Increased Competition and Supervision

While the government’s proposed market opening measures for the audit market may have provoked significant debate (in particular the hotly-contested proposal to institute a ‘managed shared audit’ requirement), one thing is clear: increasing effective competition remains a significant priority. This might be unsurprising given the Big Four’s characteristic dominance – in 2021, they earned 98 percent of FTSE 350 audit fees and 92 percent of PIE audit fees.

In December 2022, and as a follow up to its July 2022 position paper, the FRC published a policy paper on this issue. Promotion of competition to drive higher audit quality is the FRC’s desired approach. However, there of course remains the risk that quality decreases as price is driven down from increased competition. It would seem that the FRC is therefore experimenting with innovative means to promote audit quality, especially for challenger firms with less experience in larger PIE audits. One interesting example to monitor this year might be the FRC’s new ‘Audit Firm Scalebox’ initiative (announced in December 2022), which is intended to create a separate, dedicated team (alongside existing FRC supervisory work) to provide “bespoke measures” to challenger firms scaling up their engagements to PIE audits. It is hoped that those firms are then assisted with understanding regulatory expectations and developing robust quality control systems, with a channel of direct/immediate access to the FRC itself.

ESG

The FRC’s spotlight on Environmental, Social and Governance (ESG) and climate-related reporting is likely to continue, building on the work done in 2022. Such work included the FRC’s research into Modern Slavery Reporting Practices in April 2022 (which identified significant shortcomings in companies’ modern slavery reporting), the Corporate Reporting Review Team’s Thematic Review of TCFD disclosures and climate in financial statements (July 2022), as well as the FRC Lab’s report on disclosing net zero commitments (October 2022). In February 2022, the FRC issued staff guidance regarding auditor responsibilities under ISA(UK) 720 in audits of financial statements, with respect to climate-related reporting consistent with TCFD Recommendations and Recommended Disclosures. Whether additional ESG-related auditor guidance might be issued is worth keeping under continual review, given the very bright spotlight shining on this issue. 

Non-financial Misconduct

The extent to which non-financial conduct matters feature on accountancy regulators’ agendas this year may also be worth monitoring. With the High Court’s controversial 2020 judgment in Beckwith v SRA and an apparent upward trend in inappropriate sexual behaviour across the wider financial services sector, the ICAEW has, in late 2022, unsurprisingly reminded of the need to “call out” unprofessional behaviour under its duty to report misconduct rules. In the wake of the ‘#MeToo’ movement and the blurring of professional and personal life post-pandemic, firms are actively encouraged to ensure that they have not only robust and up-to-date policies regarding acceptable behaviour in the workplace, but that employees also understand such policies.

The ICAEW’s reminder would certainly be consistent with the FRC’s initiative into non-financial misconduct back in 2019 (namely in July 2019, when the FRC issued a request to the six largest audit firms for policies and procedures regarding reporting of and response to non-financial conduct matters), as well as the July 2021 guidance issued by the Consultative Committee of Accountancy Bodies (CCAB) (which sets out principles for when a professional accountant’s personal life may be the subject of regulatory scrutiny). However, whether this translates to a corresponding uptick in enforcement action this year is certainly open to question – to date, it seems only one case of sexual misconduct has come before the ICAEW Disciplinary Committee, namely in 2021, where a Big Four firm partner was severely reprimanded and fined £5,000 for making “sexually suggestive comments” towards a junior female colleague during an unofficial firm-organised skiing trip.

Plagiarism and Cheating

In a similar vein to non-financial misconduct, accountancy regulators are becoming increasingly concerned about the risks of plagiarism and cheating in online submissions and professional examinations, with studying and working from home now becoming the norm. In mid-2022, the FRC wrote to both professional bodies and the seven largest audit firms seeking a report on controls and assurances in place to identify and prevent exam cheating. With instances of cheating at Tier 1 audit firms recently uncovered, and the PCAOB’s sanctioning of KPMG LLP across the Atlantic last August for similar issues, the FRC, in an update letter at the end of 2022, noted that although systemic issues relating to cheating have not been detected, its consideration of these issues remain “live” and “ongoing”. The ICAEW echoed such sentiments in October 2022, noting that plagiarism was “on the rise”, and expressing concerns about how this might breach the Integrity principle under its Code of Ethics. In the year ahead, it would be advisable for both regulated members and their firms to be vigilant and continually improve existing processes and controls they have in this area.

While there are certainly many other wider challenges that accounting firm leaders and individual practitioners might face in 2023, we consider the above key themes to be regulatory priorities in the months ahead, and should accordingly feature strongly in firms' risk and compliance planning.

This article was first published in Accountancy Daily.

Further information

If you have any questions or concerns about the content covered in this blog, please contact Julie Matheson, Ian Ko or a member of the Regulatory team.

ABOUT THE AUTHORS

Julie Matheson is a partner in the Regulatory Team. Her expertise lies in advising professionals and professional services firms, particularly in the accountancy, audit and built environment sectors, on regulatory compliance, investigations and enforcement proceedings.

Ian Ko is an Associate (Foreign Qualified) in Kingsley Napley’s Regulatory department. His practice focuses on acting for regulators and defending regulated individuals/organisations in investigations and enforcement proceedings. He also advises in public inquiries and reviews.