Kingman Review 2018 Recommendations

 

1         Assignment Auditing

1.1         Kingman Review 2018

Audit and regulation are presently receiving an unparalleled level of scrutiny: besides Sir John Kingman’s Independent Inquiry two other significant studies are underway. The Competition and Markets Authority (CMA) has concluded its market assessment of statutory audit services and released final recommendations on 18 April 2019 (Kingman, 2018).

There should be an independent regulator that is focused on the interests of consumers of financial data and that has greatly enlarged powers and goals to replace the FRC says the review.

New regulator ARGA is recommended, and those who rely on it should dread it, while those who are subject to its control should fear it (Kingman, 2018). This new regulator will be the audit, reporting, and governance authority (ARGA). ARGA should follow the recommendations of the review:

·         The establishment of a system should includes fines as well as a process for approving and registering audit companies that perform work for public interest entities

·         Monitor audit work that is required to be done;

·         Audit Quality Reviews (AQRs) should be published after the completion of each audit quality inspection report and rating;

·         As a result, the Financial Reporting Council (FRC) should be granted more authority to demand papers or information for a CRR, and to compel revisions in accounting without the need for a court order;

·         New powers to evaluate and publish conclusions from skilled person's evaluations that are relevant to the strategic purpose of the organisation

·         Preventive measures can range from notifying this same company of its concerns and requiring the company to respond quickly and formally to (in its most serious cases) going to recommend to stockholders that they consider changing the CEO, CFO, chair or chair of the audit committee or rethink the payment of dividends;

·         Auditors are obligated to notify the board of directors if they have doubts about the financial viability of a company's audit.

·         Help develop detailed plans for an effective enforcement government concerning PIEs, which will hold to account and if required sanction all pertinent directors (CEOs, CFOs, Chairs, and Audit Chairs) individually for just any failure to discharge one‘s duties to start preparing and approve accurate corporate reports, whether or not such executives happen to be auditors.

•         Kingman review advises replacing FRC with the newer, better regulator

According to Zhongming and Wei (2022), a self-governing study of the Financial Reporting Council (FRC) has suggested that it be substituted with an autonomous body controller with "the interests of consumers of financial data, not producers," at its core (Redmond, 2020).

According to the examination chaired by Legal & General chairman John Kingman, the new entity must be responsible to the assembly, with a clear determination and objective, new control and new powers (Council, 2019a).

The government will "carry forward the proposals set out in the study to replace the FRC with a new autonomous body regulator with additional powers," according to Business Secretary Greg Clark, who requested to lead review of Kingman of the FRC.

The Kingman Review provided eighty three recommendations in all, counting placing the new group head of modifiable big audit firms, abolishing self-regulation over groups of trade, and requiring quality of audit and the company's financial reporting evaluations to be made available to the public. "Serious consideration is given to its elimination if in its impending altered form it cannot focus on 'outcomes and effectiveness' rather than policy declarations,'" the assessment concluded, calling for a "fundamental shift in approach."

As a result, the new regulator needed to communicate with investors of UK, including together money directors and advocates of end-investors, at a advanced level of seniority. Additionally, the evaluation proposed that the Prudential Regulation Authority should take over the regulation of an actuarial profession (La Torre, Dumay, Rea, & Abhayawansa, 2020).

The Financial Reporting Council (FRC) now serves as a joint regulator for accountants, auditors, and actuaries. The governance of United Kingdom and stewardship codes are also sent by this organisation. The prior was updated in July, and the FRC planned to provide a new sustainability code for public comment by the end of the year.

1.2         Auditor procurement

In addition to his examination of the FRC, Kingman was also requested by the secretary of business to explore if there was a basis for altering the procurement of audits, particularly for big public interest firms (Council, 2019b).

A letter from Kingman to Clark stated that "dramatic reform" in the appointment of business auditors was warranted, but he advised the government to take a more "modest and targeted approach" due to strong investor resistance.

1.3         Justifications of recommendations

The Kingman study recommends that AGRA implement the firm's suggestions for monitoring audit work. In order to comprehend what's going on and to challenge the businesses, and when appropriate, management, in audit, highly experienced and qualified personnel are needed. These resources can be costly, and their salaries may not be in line with Whitehall's norms. The abilities necessary for this role are similar to those needed by HMRC, thus there may need to be some alignment with their pay policy. A person's expulsion might also be considered as a violation of that person's job and human rights if it prevents them from practising in other areas of accounting unrelated to audit. An auditor who does not exhibit dishonesty or lack of integrity should be stripped of his/her Responsible Individual position, in our opinion. International investors are being harmed by the perception that UK corporations and their auditors are operating at an extremely low level, despite the fact that huge punishments have been imposed. He believes that the FRC can and should utilise its punishment capabilities to foster an improvement culture rather than a fear one, and that this would lead to higher-quality audit results. Kingman agrees..

In accordance with the another recommendations that involves fine, as well as a mechanism for auditing firms who work with public interest groups to be approved and registered. To put things in perspective, the FRC was supported ten years ago with a third coming from the accounting profession, a third from the government, and a third from business. No government subsidies are available now, and the accounting profession covers 50% of FRC's expenses. Despite the fact that it is unreasonable to advocate that the government restart some financing from public taxes, Kingman proposes below that fine money from disciplinary proceedings handled by the FRC should be held by the FRC rather than remitted to the Consolidated Fund. Fines may also be a source of funding, but there are concerns about how they are seen in terms of moral hazard, for example, regulators might be accused of being excessive in their punishments to ensure a flow of revenue. We can use penalties in this way if these worries and misconceptions can be alleviated.

1.4         For SMEs

It has been our intention to focus on the regulation of publicly traded and other firms of social significance. There are a wide range of organisations in the UK's corporate sector from this group through small and medium-sized enterprises (SMEs) to micro-companies. Due of their significance to the UK's economic growth and employment, it is imperative that this constituency is not forgotten because of the prominence of bigger corporations. For the sake of consistency, we do not feel that this would be a good idea to separate the duty for regulating smaller enterprises from the responsibility for their financial reporting duties and audits. However, regulators must ensure that their efforts are focused and proportionate, and this may need the creation of dedicated departments or personnel in each of the regulator's several areas of responsibility. The regulator should continue its role in defining standards, but existing monitoring systems, such as the professional accountancy groups, should be used for audit and accounting concerns at the smaller end of the market. As a result of the FRC's determination of fines, obligations, and other punishments, Smaller businesses' desire to enter the audit market might be strongly influenced by the method used, especially the various weights assigned to financial and non-financial punishments.

The audit and accounting industry contributes half of the FRC's budget. The result of distributing this among the enterprises and RSBs is that the larger companies pay the most of it. This does little to eliminate the impression of 'closeness' to the Big Four, which is a common notion. But if the scales tipped in favour of other companies, it would be extremely difficult for smaller businesses to enter the market, which would lead to lower levels of competition overall. We believe that the Financial Reporting Council (FRC) has a critical role to play in ensuring that the UK economy is properly represented by small and medium-sized businesses (SMEs), as well as by ensuring that they are properly represented in the FRC governance structure. An capacity to comprehend and solve the concerns of SMEs and SMPs should take precedence over the FRC's previous focus on PIEs.

In this sense, there is a strong impression that the FRC continues to view enforcement as a means of improving audit quality. However, there are a variety of unintended consequences that, when taken to extremes, result in the opposite dynamic. Punitive punishments, for example, have the advantage of delivering a message to the public that "something is being done," but at the same time do not appear to be making any apparent attempt to enhance education or understand the causes of bad performance in companies. Deterring market players and partners from working on PIE audits is one of the benefits of fines, but it may also be one of the drawback. As a result, audits have a lower overall quality. In the case of a company's failure, the public will be led to believe that the auditors are to blame rather than the company's directors. In keeping with this, the FRC's Audit Enforcement Procedure now includes a single standard for small inadvertent errors as well as high visibility negligent errors. In light of the foregoing debate, it may be determined that these guidelines are not very useful for small businesses as our business is.

 

 

 

 

 

 

 

 

 

2         References

Council, F. R. (2019a). Developments in audit 2019. London, UK: FRC.

Council, F. R. (2019b). Governance Handbook.

Kingman, J. (2018). Independent review of the financial reporting council. Retrieved November, 10, 2020.

La Torre, M., Dumay, J., Rea, M. A., & Abhayawansa, S. (2020). A journey towards a safe harbour: the rhetorical process of the International Integrated Reporting Council. The British accounting review, 52(2), 100836.

Redmond, T. (2020). Independent review into the oversight of local audit and the transparency of local authority financial reporting. London: MHCLG.

Zhongming, Z., & Wei, L. (2022). Business Secretary appoints new non-executive directors to board of Financial Reporting Council.