Seismic shifts in the audit and accountancy regulatory landscape were set in motion last year, which are expected to continue to take shape and impact the sector during 2022. Several themes will dominate the terrain:
AUDIT REFORM
Perhaps the most significant event to take place last year was the BEIS proposals on “Restoring trust in audit and corporate governance”. Alongside the Financial Reporting Council’s (FRC) transformation into the Audit, Reporting and Governance Authority (ARGA), the consultation included proposals such as: the widening of the definition of a Public Interest Entity (PIE) with the potential effect of a significant number of mid-tier audit firms entering the PIE market and falling within the regulatory spotlight; an expansion of the regulator’s remit to encompass company directors; and the introduction of the managed shared audit requirement. While some press reports published towards the latter months of 2021 suggested these changes may not be fully realised to the extent first proposed, the final reforms – what they will entail and the full impact they will have – remain elusive and will no doubt dominate the scene when they are formally announced in 2022.
ESG AND CLIMATE-RELATED RISKS
Environmental, Social and Governance (ESG) challenges and climate-related reporting have been high on the FRC’s agenda for some time. Following the FRC’s 2020 climate thematic review, several projects and policy statements have followed suit in 2021, including the FRC Statement of Intent on ESG challenges and its thematic review on Streamlined Energy and Carbon Reporting. The FRC’s focus on climate-related reporting is expected to continue in 2022, propelled by its earlier work and the outputs of COP26. As of the end of 2021, UK premium-listed companies will be required to report under the Taskforce on Climate-related Financial Disclosures (TCFD) global framework, with other companies to follow over the next few years. In anticipation of this, the FRC published practice guidance in October 2021, and subsequently announced it will commence new thematic work in 2022 of TCFD disclosures and the extent to which financial statements reflect the impact of climate change.
DIVERSITY AND INCLUSION
Regulatory attention to the importance of diversity and inclusion has grown significantly over the last year. In July 2021, the FRC’s research on Board Diversity and Effectiveness in FT350 Companies underscored the UK Corporate Governance Code’s requirement for companies to promote diversity, by highlighting the benefits of diversifying boards, and the need to set clear targets and report against them. Audit and accountancy firms are also likely to become much more aligned with other professions in terms of reporting diversity data. Currently, the ICAEW only collects such data from probate firms as it is required to do so by statute as a legal services regulator of probate. All legal services regulators routinely require their regulated firms to provide this data, and there are clear signs this may spread more widely to other professions. Indeed, the FCA, PRA, and the Bank of England recently consulted on diversity monitoring for the firms they regulate. Not only may this impact firms authorised by the ICAEW that undertake investment business, it may well propel the FRC and its front-line regulators to take a similar approach.
BOUNDARIES BETWEEN PROFESSIONAL AND PERSONAL LIFE
Questions around the extent to which inappropriate behaviour unconnected to the delivery of professional services falls within a regulator’s remit are likely to continue into 2022. The ICAEW reported a growing number of cases involving inappropriate social media posts in 2021. In addition, sexual misconduct has become a topic of much discussion following the High Court decision in Beckwith v Solicitors Regulation Authority [2020] EWHC 3231 (Admin) and the ICAEW’s sanction of a Big Four firm Partner in 2021 for “sexually suggestive comments” made towards a junior female colleague during an unofficial firm-organised skiing trip. The ICAEW’s revised guidance on the duty to report misconduct now includes inappropriate use of social media and electronic communications, and sexual misconduct/harassment of work colleagues or other persons outside of the workplace as examples of matters likely to constitute misconduct relating to a member’s personal activities. New guidance issued last year by the Consultative Committee of Accountancy Bodies (CCAB) on the boundaries of professional and private behaviour also sets out, for the first time, a list of agreed principles which will apply when a professional accountant’s behaviour in their personal life could become of regulatory interest. As the boundaries between personal and professional behaviours become increasingly more blurred, this area is likely to continue to evolve in 2022.
THE USE OF TECHNOLOGY IN AUDIT
The COVID-19 pandemic has accelerated a reliance on technology in audit. We saw a significant increase in articles and resources produced on this topic by the front-line regulators in 2020, notably the ICAEW and ACCA. In December 2020, the FRC published its response to its consultation on Technological Resources. Several actions were proposed including a newly reformed FRC Audit Technical Advisory Group, new guidance to the profession, as well as continued monitoring of the market and enhanced engagement with technology providers and stakeholders. As of the end of 2021, the FRC was yet to announce progress made in this area, suggesting this is likely to come in 2022. Further discussion is still required in many areas, including how audit tools and technology will be regulated and how the FRC will offer the clarity, support and flexibility needed such that technology use is encouraged rather than hindered.
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