The King’s Speech has unveiled plans for a Draft Audit Reform and Corporate Governance Bill, signalling significant changes in the UK’s regulatory landscape. MBK Search has pulled out these crucial aspects that risk managers and compliance professionals need to understand:
Creation of ARGA: A New Regulatory Powerhouse
The bill proposes replacing the Financial Reporting Council (FRC) with the Audit, Reporting and Governance Authority (ARGA), addressing longstanding concerns about the FRC’s effectiveness. ARGA is expected to have stronger statutory powers and clearer objectives than its predecessor.
Key Legislative Points:
- Statutory Objectives: ARGA will have explicit objectives to protect and enhance audit quality, promote transparency, and improve corporate governance.
- Powers and Duties: The authority will have powers to set audit standards, enforce compliance, and impose sanctions on non-compliant entities.
- Funding: A new statutory levy will replace the existing voluntary levy, ensuring ARGA has the necessary resources.
Risk managers should anticipate more rigorous oversight and stricter enforcement actions. Compliance teams will need to reassess their audit and governance frameworks to align with ARGA’s forthcoming requirements.
Enhanced Regulatory Toolkit
The new legislation aims to fill significant gaps in the current regulatory framework, as highlighted by FRC CEO Richard Moriarty.
Key Legislative Points:
- Comprehensive Regulation: The bill includes measures to enhance ARGA’s oversight of audit committees, corporate reporting, and the actuarial profession.
- Competition Powers: ARGA will have the power to address anti-competitive practices in the audit market, including potential measures to reduce the dominance of the Big Four firms.
Compliance professionals should prepare for a more comprehensive and potentially complex set of rules and guidelines. This may require updates to internal controls, reporting procedures, and risk assessment methodologies. Early preparation and gap analysis against anticipated regulations will be crucial.
For example, a large bank might integrate new ARGA-specific controls into its existing risk management system, while a small community bank might need to develop new protocols from scratch, possibly with help from external consultants.
Focus on Investor and Stakeholder Confidence
The bill’s primary goal is to strengthen audit and corporate governance, boosting confidence among investors, employees, and consumers in the health of UK companies.
Key Legislative Points:
- Enhanced Reporting Requirements: Companies must provide more detailed and transparent reports on their financial health and governance practices.
- Stakeholder Engagement: The legislation encourages greater stakeholder engagement to ensure their interests are adequately represented.
Risk managers must emphasize transparent reporting and robust governance structures. This may involve enhancing stakeholder communication strategies and implementing more stringent internal audit processes to ensure the accuracy and reliability of financial and non-financial disclosures.
Balancing Regulation and Business Needs
The legislation aims to balance increased regulation and avoiding excessive red tape.
Key Legislative Points:
- Proportionate Regulation: The bill includes provisions to ensure that regulatory requirements are proportionate to the size and complexity of the business.
- Red Tape Reduction: Measures to streamline regulatory processes and reduce unnecessary business burdens are included.
Compliance teams will face the challenge of implementing new requirements without overburdening business operations. Risk managers should work closely with business units to integrate compliance measures seamlessly into existing processes, focusing on efficiency and effectiveness.
For example, a mid-sized firm might implement new compliance measures in stages, ensuring each step is integrated smoothly with minimal disruption to daily operations.
Implications for the ‘Big Four’ and Beyond
Previous government plans included measures to tackle the dominance of the ‘Big Four’ audit firms and reduce the risk of major company collapses.
Key Legislative Points:
- Audit Market Reforms: Potential measures include mandatory joint audits and rotation of audit partners to prevent conflicts of interest.
- Non-Audit Services Restrictions: Limits on the types of non-audit services that audit firms can provide to their audit clients.
Risk managers in large corporations and audit firms should prepare for potential changes in audit partner rotation rules, restrictions on non-audit services, or even mandatory joint audits. This could necessitate a review of existing audit relationships and internal capabilities.
Implications for Hiring in Governance, Risk, and Compliance
The introduction of the Draft Audit Reform and Corporate Governance Bill is expected to increase the demand for professionals in governance, risk, and compliance (GRC). Here’s how these changes might affect hiring:
Increased Demand for Specialized Roles: Organizations will need experts in audit reform, corporate governance, and regulatory compliance. Roles such as Audit Compliance Officers, Governance Advisors, and Risk Management Specialists will become increasingly important.
Skills in Demand: Professionals with experience in regulatory compliance, audit processes, corporate governance, and risk management will be highly sought after. Knowledge of the new ARGA regulations and how to implement them will be valuable.
Opportunities for Career Growth: The need for robust audit and governance frameworks opens up opportunities for individuals skilled in creating and maintaining these systems. As companies adapt to the new regulations, leadership will be demanded in these areas.
Hiring Strategy: Recruitment companies should focus on finding candidates with strong backgrounds in GRC, particularly those with experience in the financial sector. Continuous professional development and training in the latest regulatory practices will be key to attracting and retaining top talent.
Practical Steps for Compliance
- Conduct a Gap Analysis: Identify where current practices fall short of the new requirements.
- Update Internal Controls: Revise procedures and policies to meet the new standards.
- Enhance Reporting Procedures: Ensure transparency and accuracy in all financial and non-financial disclosures.
- Strengthen Stakeholder Engagement: Develop strategies for effective communication with investors, employees, and other stakeholders.
- Train Staff: Invest in training programs to ensure all relevant personnel are up-to-date with the new regulations.
