Accountants

In this chapter of our Annual Insurance Review 2023, we look at the main developments in 2022 and expected issues in 2023 for accountants.

Key developments in 2022

As anticipated in our last annual review, following on from the Government's "Restoring trust in audit and corporate governance: proposals on reforms" consultation in 2021, audit reform has remained high profile for accountants this year.   

The long-awaited reforms, which seek to restore public trust in the way the UK's largest companies are run, follow on from several sudden high-profile corporate collapses in the last 4-5 years. In May 2022, the government published its final proposals for reform, which include further transferring power away from professional bodies to a new regulator. The Financial Reporting Council will be replaced by the Audit, Reporting and Governance Authority (ARGA), whose overarching objective will be to "protect and promote the interests of investors, other users of corporate reporting and the wider public interest." The intention is that ARGA will have increased enforcement powers.

Substantial changes are expected as a result. Key amongst the intended reforms is to make reporting more useful, with better information about the risks a company faces, improving the quality of audit reporting and boosting competition and choice within the audit market. Further, it is intended that ARGA will have the power to set minimum enforceable standards for audit committees in relation to both the appointment and oversight of auditors.

It had been hoped that the government might publish a draft bill, detailing the necessary legislative changes by the end of this year. However, against the current economic and political backdrop, this is now expected in 2023, with the changes themselves likely to come into effect in 2024.

In Asia, Hong Kong is also undergoing significant regulatory reforms. On 1 October 2022 the Financial Reporting Council (FRC) was renamed as the Accounting and Financial Reporting Council (AFRC) and has now become a full-fledged regulator regulating the entire accounting profession. Under the new regime, the AFRC is now vested with expanded statutory functions including registration, inspection, investigation and disciplinary. 

On 26 August 2022, the US Public Company Accounting Oversight Board (PCAOB) and the PRC China Securities Regulatory Commission (CSRC) and Ministry of Finance (MoF) signed a Statement of Protocol that would allow US regulators access to audits of Chinese companies listed on the US stock exchanges. This marks a landmark agreement between US and Chinese regulators on a longstanding issue stemming from the PRC regulations prohibiting disclosure of audit working papers to foreign regulators. 

What to look out for in 2023 

Under the proposed new reforms, it is expected that the new definition of Public Interest Entity (PIE) will bring audits of around 600 more companies and LLPs under the remit of the new audit regulator ARGA. 

Given the wider definition of PIE and the need for FTSE350 companies to allocate at least a proportion of their audits to non-Big 4 accountants, more audit firms will now need to familiarise themselves with the existing and new PIE audit requirements. The additional regulatory burden of carrying out PIE audits (together with the need for firms and registered individuals to specifically register for PIE audit work) should not be underestimated.

Further guidance from the government, the FRC and ICAEW will inevitably be published shortly. With the new reforms now very much in sight, audit firms will need to establish suitable processes to identify the further guidance provided and ensure the same is considered and adhered to within their businesses.   

Additionally, given the current economic climate, the impending and potentially long-lasting recession may result in a sustained rise in corporate insolvencies. With the appointment of administrators / liquidators there is a likelihood that investigations into whether the failed company has any potential claims against their professional advisers, will lead to an increase in claims against accountants / auditors, who are often a prime target. Some audit firms that have taken on larger (sometimes riskier) audits previously undertaken by the more experienced and better resourced Big 4 may find themselves exposed.

In Asia, the PCAOB's inspection of Chinese audit working papers mentioned above will be closely monitored by the entire industry. The US-listed Chinse companies selected for inspection include household names such as Alibaba and Yum China Holdings Inc, and the onsite inspection would be carried out in Hong Kong. The success of this cross-border inspection is important to all Chinese companies currently being listed in the US as the US has threatened to delist these companies if their audits are not made available to the US regulators for inspection. 

It also remains to be seen how the new regulator in Hong Kong, the AFRC, will implement its new disciplinary process. It is expected that with a more complicated process now being put in place, accountant respondents will likely spend more time and costs dealing with contested disciplinary hearings, and there will potentially be more appeals to the Courts if the respondents are not satisfied with the disciplinary outcomes. 

Written by Sarah Dowding & James Lee.

Download our full Annual Insurance Review 2023 for more insights.