Although the audit is the least susceptible to various transformations, the pandemic has made adjustments to the usual audit life, forcing the audit to modernize along with other areas of activity. These processes are most pronounced today in the United Kingdom. What is happening with the audit in the Foggy Albion and how these processes may affect the domestic audit market below.

Background

Recently, UK business secretary Kwasi Kwarteng, has come up with a proposal to overhaul the UK audit sector, which aims to reduce the dominance of the Big Four and increase the accountability of directors of large companies.

In a 232-page white paper, Kwarteng outlined a series of audit reforms aimed at protecting jobs, avoiding company bankruptcies and boosting the UK’s reputation as a country attractive for investment.

Audit reforms

Preferences for local audit firms

The document proposed by Kwarteng states that large companies must hire a smaller “challenger” firm to conduct a significant part of their annual audit, weakening the position of big-name auditors who put markets at risk. This step will boost jobs and strengthen the position of small audit firms across the country. Thus, in the UK, post-pandemic plans are to support local audit firms, giving them more opportunities for development.

Watering down the supremacy of the Big Four

The Big Four may face limited market share and provide audit to FTSE 350 at best, if the competition in the sector does not improve.

New regulator

The document also refers to a new regulator of the audit market – the Audit, Reporting and Governance Authority (ARGA), which will be able to supervise the largest unlisted companies, as well as the stock market. ARGA will have the authority to split audit and non-audit functions of audit firms to reduce the risk of any conflicts of interest that may affect the quality of audit they provide.

Restoring trust in the corporate governance regime

Kwarteng said: “Restoring business confidence, but also people's confidence in business is crucial to repairing our economy and building back better from the pandemic.

When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.

By restoring trust in our corporate governance regime and encouraging greater transparency, we will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country.”

Audit must be trusted

The reform package envisages the introduction of new reporting obligations for both auditors and directors to detect and prevent fraud. The board must set out what internal controls they have, and the auditors must identify problems.

It is planned that the audit will be able to go beyond the company's financial results to assess wider performance, including against key climate targets, to ensure full awareness of investors and other stakeholders and to hold companies accountable, as the UK seeks to minimize its contribution to climate change by 2050.

The new regulator will be backed by legislation, funded by a mandatory industry levy, and will have much broader powers to enforce standards. For example, where there are serious problems, ARGA will be able to force companies to change some aspects of their activities and redo their accounts without having to go through the courts.

Strengthening the responsibility of managers of large companies

As part of the reforms, Kwarteng seeks to increase the responsibility of directors of UK largest companies for negligent performance of their duties.

Directors of large businesses may face fines or suspension in the event of serious failings – significant errors with accounts, hiding crucial information from auditors or providing opportunities for fraud.

According to the UK’s Corporate Governance Code, companies can be expected to write into directors’ contracts that their bonuses will be repaid for two years in the event of a company collapses or serious director failings, thus cancelling the ‘reward for failure’.

Large businesses need to be more transparent about the state of their finances, so they avoid paying dividends and bonuses at a time when there is a risk of insolvency. Directors will also publish annual ‘resilience statements’ describing how their organization mitigates short and long-term risks by encouraging their directors to focus on the company’s long-term success and address key issues such as the impact of climate change.

Ukrainian audit and UK reforms: what's next

What impact can this document have on the domestic audit market? One way or another, Ukraine has long been part of the European market, so the reforms taking place there will affect us as well. It's only a matter of time.

That’s why Ukrainian audit firms, realizing the fact that their importance will grow more and more, must focus on their own development.