Response to the Consultation on Restoring Trust in Audit and Corporate Governance: July 2021

Recommendations

1. ARGA’s governance arrangements must ensure it is fully independent and include an open and transparent recruitment process to guard against industry capture and have in place strong revolving door and conflict of interest prohibitions.
2. Auditors’ legal responsibilities and liabilities with regard to fraud detection should be clarified within the new ISA (UK) 240 standard document so that audit firms, auditor partners and the public have a better understanding of the required standards.
3. An Independent Fraud Panel should be established within ARGA with sufficient powers and resources to conduct complex investigations into cases of serious audit failure. The Panel should have at its disposal a range of sanctions including levying of fines that take into consideration the seriousness of the misconduct as well as the size of the audit firm.
4. ARGA should introduce changes to the UK Corporate Governance Code to include mandatory malus and clawback conditions in PIE directors’ remuneration agreements for causing, and/or failing to prevent conduct within companies that results in, negative material impact on firms’ financial performance or reputation.
5. ARGA should deliver a full structural separation between audit firms’ audit and non-audit functions with prohibitions in place to restrict cross-subsidies or common ownership between firms. A structural separation would prohibit audit firms over a certain size from providing non-audit services in the UK, and would require firms to recruit non-audit related services externally from an independent non-audit practice.