Accountants

In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Accountants.

Key developments in 2023

In our last annual review, we reported on the anticipated progress that 2023 was likely to bring in terms of UK audit reform regulation.  Following delays to the timetable, a draft bill had been expected late in the year, with the reforms to come into force in spring 2024.  However, the exclusion of audit reform from the King's Speech in November 2023 means that the proposed reforms will most likely be delayed until at least after the next General Election (likely to be in 2024 and before late January 2025), disappointing many.

The reforms were intended to restore public trust in the way the UK's largest firms are run, following several high-profile corporate collapses in the last few years.  Central to this was the proposed transformation of the Financial Reporting Council (FRC) into the Audit, Reporting and Governance Authority (ARGA), a new regulator with an expanded remit and increased enforcement powers.  The reforms proposed were to improve the quality of audit reporting, set minimum standards for audit committees, and widen the definition of Public Interest Entities (PIE), bringing around 600 more companies under ARGA's remit.  They had also been aimed at increasing competition in PIE audits, an area currently dominated by the 'big four'.

The FRC is, however, in the process of implementing several of the reforms that do not require primary legislation. These include amendments to the UK corporate governance code, although in its published statement of 7 November 2023, the FRC confirmed it will now only take forward a small number of the original proposals in this area. 

The FRC also launched its regulatory 'scalebox', a means for existing smaller PIE audit firms to obtain additional support from the regulator to expand the scope of their PIE audit work.  The FRC has also created a new 'tier' for current non-PIE audit firms looking to join the PIE audit market.

The FRC has doubled in size over the last four years, in preparation for the ARGA transition, and has imposed record fines on accounting firms for poor quality audit work.  In December 2023 it also indicated an intention to crack down on audit quality at smaller 'tier 2' and tier 3' PIE audit firms.  Even in the absence of wider reforms and primary legislation it is therefore clear that audit firms will continue to be closely scrutinised.

What to look out for in 2024

Reform will continue to be a key factor in the accountancy field in 2024. The ICAEW, the largest UK accountancy member organisation, has been consulting on proposed changes to its professional indemnity insurance (PII) regime for its members. 

The ICAEW identified several factors necessitating this review, including: the changing nature of the structure of firms (and their insurance arrangements); the financial capacity of its members; increased pressure to manage the costs of insurance; and an increase in firms unable to obtain qualifying insurance.  The consultation took place between October and December 2023. 

The reforms are likely to see changes to the current minimum insurance levels in place for all sizes of firm, with the minimum level of cover for many firms (excluding the largest and smallest categories) to increase significantly from £1.5m to £2m in the aggregate, with defence costs in addition.  Other proposed amendments for certain categories of firm include allowing for the excess to be applied to defence costs, and providing for a significantly extended period of run-off cover.  The ICAEW will also provide further guidance to clarify how 'compound firms', i.e. multiple entities within a group, are to be treated for the purposes of its insurance requirements.

The focus of the proposed amendments appears to be increased consumer protection, and the ICAEW's self-expressed role as an improvement regulator, acting to "strengthen trust in ICAEW Chartered Accountants and firms" is to be welcomed.  That said, many in the industry have expressed concerns about the potential increases to premiums payable by firms as a result of the amendments.  Insurers may also be concerned about some of the proposed amendments, including the significantly extended mandatory run-off cover period, and a suggestion that Insurers should pay the firm's excess should the firm become insolvent.

More will be known soon, as the ICAEW has confirmed it will report on the outcome of the consultation in early 2024.

Written by Sarah Dowding.