Original recommendation

The CMA study recommended robust regulatory oversight of the committees that run the selection for audited companies, and oversee the audit, to make them more accountable and ensure that they prioritise audit quality. (Source: CMA)

Proposals

The Government proposes (Section 7.1) to require ARGA to impose additional requirements on audit committees in relation to the appointment and oversight of auditors. These requirements will cover the need for audit committees to continuously monitor audit quality, and consistently demand challenge and scepticism from auditors. The requirements set by the regulator will initially apply in relation to audit committees of FTSE 350 companies and will set minimum standards which audit committees will be free to exceed as they wish. The Government is also proposing regulatory powers for ARGA where problems exist, such as when an auditor resigns, when a public interest entity (PIE) is unable to find an auditor and when a persistent issue with audit quality is identified.

The Government proposes to impose a duty on ARGA to monitor compliance with the new audit committee requirements, including through a power to require information and/or reports from audit committees, and a power to place an observer on audit committees if necessary. ARGA will have the power to take action in relation to breaches of the new audit committee requirements.

Government response

The Government intends to proceed with giving ARGA the power to set minimum requirements on audit committees in relation to the appointment and oversight of auditors. The scope of these requirements will be set out in legislation and the Government intends that they should apply initially to FTSE 350 companies. Once the requirements have been implemented, ARGA will monitor their impact.

The Government has concluded that it is not appropriate or necessary to provide a power for ARGA to place an independent observer on the audit committee and also that it will not legislate to give powers to ARGA to appoint an independent auditor in certain circumstances.