In this chapter of our Annual Insurance Review 2021, we look at the main developments in 2020 and expected issues in 2021 for accountants.
Key developments in 2020
In 2020 we saw the Financial Reporting Council (FRC) adopt a more robust approach towards implementing its enforcement powers than in previous years. The Kingman Review of the FRC appears to have prompted the regulator to try to shake off the label of not being fit for purpose.
In July 2020 the FRC's "Annual Enforcement Review" showed that its Enforcement Division had grown. The FRC also increased the number of conduct issues identified by "horizon scanning" (i.e. carrying out pro-active searches of companies' misconduct) by 80% in 2020 compared to 2019. But the FRC's more robust approach to enforcement is unlikely to change the government's commitment to replace the FRC with a new regulator (the Audit, Reporting and Governance Authority).
The release in 2019 of the Brydon Report, which called for industry wide audit reform, also had an impact in 2020. The report suggested that auditors have "an obligation to be suspicious as well as sceptical". There still seems to be a disconnect between the general public's perception of the role of an auditor and the reality of what an auditor's job entails. The Brydon Report suggests that in the future auditors may be expected to take a more investigative approach to identify corporate fraud in line with the public's perception of the role of auditors. The additional cost of such an approach is unlikely to be welcome to audited entities.
Accountants will no doubt have been kept busy this year advising businesses on the Coronavirus Job Retention Scheme (CJRS) or "furlough" scheme. Auditors will have also needed to keep a close eye on their clients' accounts in cases where support grants have been received. A failure to identify "furlough fraud" may put auditors in the spotlight especially if it could be said they did not adopt enough professional scepticism when reviewing a company's accounts.
What to look out for in 2021
We expect to see more accountancy firms restructure their business models in the next 12 months. The Big Four accountancy firms have until 2024 to separate their auditing practices from other business areas. We have already seen some firms (including those outside of the Big Four) make this change in recent months and we foresee this approach will become the norm for larger firms.
The separation of accountancy firms' audit work from the rest of their business is in line with the recommendations of the Kingman Review and the Brydon Report. We will have to see whether this change reduces auditors' exposure to potential claims for failing to identify discrepancies in companies' accounts.
We anticipate that insolvency practitioners and accountants advising businesses that are facing financial difficulties as a result of COVID-19 may face an increased exposure to claims in the next few years. The number of insolvencies to September 2020 were down by over a third compared to the same period in 2019. However, the eventual withdrawal of the government's support packages for SME businesses is likely to result in more insolvencies. This is likely to lead to an increased workload for insolvency practitioners who may face claims from disgruntled creditors and/or shareholders. Similarly, auditors and accountants for (and professionally qualified directors of) insolvent firms will inevitably face significant scrutiny of their work prior to the businesses' insolvency, even more so following the Court of Appeal's decision in AssetCo v Grant Thornton which is seen by some claimant firms as encouragement to pursue claims against auditors for companies' trading losses.
Authored by Matthew Watson
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