Audit Reform; ShareSoc & UKSA joint response to BEIS Consultation

ShareSoc and the UK Shareholders Association made a joint submission in a massive 77 page response to the BEIS consultation “Restoring trust in audit and corporate governance”.

Our full consultation response is here: BEIS-Restoring-trust-in-audit-and-corporate-governance-Joint-response-from-UKSA-and-ShareSoc-1-July-2021

The FCA consultation document can be read here: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/970673/restoring-trust-in-audit-and-corporate-governance-command-paper.pdf

Key Points:

Stakeholder and wider public trust in the credibility of directors’ reporting and the statutory audit has been shaken by a succession of sudden and major corporate collapses which have caused serious economic and social damage.
We consider that these collapses should not simply be attributed to “a few bad actors.”
These collapses have highlighted major systemic failings in the current system of corporate governance, reporting and auditing; despite most good actors behaving responsibly and in good faith.
ShareSoc and UKSA approve of and support the thrust of the proposed changes. The proposals set out in the consultation document should improve the situation, if implemented. However, we believe that in many cases they do not go far enough and point out how they could go further.

Regulatory Capture

The FRC Board and its main committees have been dominated by accountants. This approach has not worked well for shareholders and other stakeholders. ARGA and its main committees must be representative of the users of accounts, the customers. We can no longer as a society afford to have audit being run by accountants for the benefit of accountants.

The share registration system disenfranchises the beneficial owners of shares

British company law is predicated on the model that the registered owner of a share is the sole person who can vote that share. It was developed at a time when share ownership was always evidenced by entries on the register of shareholders and the issue of paper share certificates.

The method of appointing auditors requires radical change

The present vote by shareholders to appoint the audit firm is a legal fiction, and in practice nearly always a “rubber stamp” of the firm recommended by the Board of Directors.

We recommend that for PIEs, the audit firm should be directly appointed by ARGA, with ARGA agreeing the audit fee. Only such radical change can ensure that auditors are motivated solely by the imperative of maximising audit quality and challenging any corporate reporting that they consider deficient. We have no objection to continuing with a confirmatory vote of shareholders, as happens at present.

Change the legal responsibility of directors

We welcome the proposal to give ARGA the power to regulate all directors, not just those who are members of professional bodies. However further changes beyond that are required. ARGA and other regulators should cease fining companies for any reporting or company law failures. Although such a fine is legally paid by the company, its economic cost always falls upon the shareholders, all of whom are innocent, except (possibly some) directors and employees. Fines for misconduct by a company should always be levied on the responsible directors or other responsible third parties.

More legal protection for whistleblowers, regulators, and auditors

A system for significant financial compensation, modelled on that used in the USA, is required to protect whistleblowers in the UK. Furthermore, whistleblowers, ARGA and its staff need stronger legal protections so that any person seeking to challenge ARGA through the courts should be required to prove actual malice on the part of ARGA or individual members of staff.

Auditor resignation statements should be absolutely privileged, alongside a strengthened duty upon auditors to report fully and frankly all the circumstances leading to the cessation of the audit engagement.

Expanding the number of firms capable and willing to audit PIEs

We recommend applying a market share cap to the Big 4 audit firms, initially fairly loose to enable time for adaptation, but with that cap later becoming tighter. This would create a guaranteed market for challenger firms.

Is ARGA the most appropriate body to undertake oversight and regulation of the actuarial profession?

Actuarial regulation seems to have fallen into the FRC’s remit by accident. It may not therefore get the attention that is needed to safeguard the interests of investors in insurance companies and of consumers of insurance. Accordingly, we recommend finding a different home for actuarial regulation to allow FRC/ARGA to focus on governance, reporting and audit.

The PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best placed to take on all the actuarial responsibilities currently vested in the FRC.

Implementation planning, monitoring of progress and funding ARGA adequately.

We stress the need to set goals in terms of outputs that are relevant to end users/customers. The FRC has estimated that the implementation of much-needed reform of annual reporting is likely to be a ten-year project. This seems appropriately pragmatic and requires long-term planning. Government needs to continue to monitor progress and ensure ARGA reports on progress against its goals.

It is vital that ARGA has all the resources it needs in this respect. The consultation talks about the funding of ARGA by statutory levy (a system which many consider unsatisfactory), but there is no discussion of the level of resource that ARGA might require even over a five-year, let alone a ten-year, horizon.

Post Date: July 2, 2021

Group description:	SIGnet Taunton is a new group with around 10 keen members at present, with a range of investment styles and experience. We welcome new members.
Meeting Type/Venue:	In person meetings at a golf club near to the centre of Taunton.
Meeting Frequency/Timing:	We meet on the first Monday of every month at a golf club near to the centre of Taunton, 11am until 3pm with a lunch break.

Group description:	An online group for those who are new to investing, or have only been investing for a few years. Including topics such as: – What is a share or a bond, why and how to buy them. – Comparing funds, unit trusts, Investment trusts and exchange traded funds. – Portfolio management and diversification. – ISAs, pensions, SIPPS and how to save tax. – How terms such as PE ratio and dividend yield are used to value a share. – How to use technical analysis or charting.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Monday of the month at 7:00pm.

Group description:	An online group for those who already have some experience in investing. Covering topics such as finding companies to invest in, financial statements and ratios, valuation / margin of safety, analysis of companies and investment trusts and exchange traded funds.
Meeting Type/Venue:	Online using Zoom.
Meeting Frequency/Timing:	Meetings are usually held on the last Wednesday of the month at 7:00pm.

Group description:	The Equity Income Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on dividend paying Investment Trusts, though there is also discussion around individual shares.
Meeting Type/Venue:	Meetings are held online.
Meeting Frequency/Timing:	Meetings are held every 6 weeks on a weekday between 7 and 8:30pm.

Group description:	The Group welcomes investors of all levels of experience, from beginners to advanced. The focus of meetings is on all types of income generating financial instruments, from stocks through Trusts and Funds and ETFs to retail bonds. Meetings involve presentations from members, who are also expected to lead discussions from time to time, as well as discussions on what has been bought and sold since the last meeting.
Meeting Type/Venue:	Meetings are in-person in a venue in Central London.
Meeting Frequency/Timing:	Meetings are usually held on the last Thursday of every other month, starting with an informal lunch around 1pm followed by discussions until around 5pm.

Audit Reform; ShareSoc & UKSA joint response to BEIS Consultation

Key Points:

Regulatory Capture

The share registration system disenfranchises the beneficial owners of shares

The method of appointing auditors requires radical change

Change the legal responsibility of directors

More legal protection for whistleblowers, regulators, and auditors

Expanding the number of firms capable and willing to audit PIEs

Is ARGA the most appropriate body to undertake oversight and regulation of the actuarial profession?

Implementation planning, monitoring of progress and funding ARGA adequately.

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Group description:	A welcoming group open to all types of investors. Typical meeting content is to have a deep dive presentation on a topic selected by the participants and a session on buy/ sell/ key lessons learnt last month.
Meeting Type/Venue:	In person at a friendly pub close to Piccadilly Circus
Meeting Frequency/Timing:	Monthly during the evening on the first Wednesday of the month.

Group description:	All levels of experience welcome. A typical meeting agenda includes: – Macro Environment – Trades: Members review existing positions and identify securities with promising TA entry patterns or setups and with suitable risk/reward. Any security, long, short, futures, options may be considered. The convener takes actual positions in trades and maintains his own detailed ledger, accurately measuring performance of individual securities and cumulative activity. Members are notified by e-mail prior to the entries or exits that are decided upon. Following each meeting an updated copy of the ledger is circulated together with the next meeting agenda. Members may wish to maintain similar ledgers of their own but there is no obligation to do so. – Technical Analysis: Techniques and systems used in trades. Members can request discussion of particular aspects of TA.
Meeting Type/Venue:	Online via Zoom
Meeting Frequency/Timing:	The first Tuesday of every month from 7 to 9pm

Group description:	Open to all investors / people with an interest in investing. Typical meeting will involve members talking about recent purchases, successes, failures and possible future purchases. Also with occasional visiting speakers or members making presentations on a topic of interest.
Meeting Type/Venue:	We aim to meet on the last Tuesday of each month in a private room at a pub in Playhatch. Start time 7pm with members encouraged to meet up around 6pm for a bite to eat / drink before hand, if their diaries allow.
Meeting Frequency/Timing:	7pm on the last Tuesday of the month. Meetings likely to last about two hours but with informal ‘overspill’ before / after.

Group description:	Our group members have wide ranging investment experience and work backgrounds. Discussion topics include reviewing our recent stock or collective investment buying and selling activity, plus what we are considering buying or selling and the reasons for our decisions. We also have a wider discussion on where we think opportunities might arise in the next few months and what we think needs to be avoided. Members occasionally lead discussions on specific topics such as recent events attended, articles or books of interest and sources of investment ideas and information.
Meeting Type/Venue:	During the pandemic our meetings were held on Zoom, but we have now resumed meeting in person at a location a few miles to the west of Colchester. Most meetings will now be in person, but it is possible that occasional meetings will be held on Zoom in special circumstances.
Meeting Frequency/Timing:	We meet midweek every two months. Zoom meetings run for about two hours from 10.30am and in person meetings from 11am until about 3pm, including a break for lunch.

Audit Reform; ShareSoc & UKSA joint response to BEIS Consultation

Key Points:

Regulatory Capture

The share registration system disenfranchises the beneficial owners of shares

The method of appointing auditors requires radical change

Change the legal responsibility of directors

More legal protection for whistleblowers, regulators, and auditors

Expanding the number of firms capable and willing to audit PIEs

Is ARGA the most appropriate body to undertake oversight and regulation of the actuarial profession?

Implementation planning, monitoring of progress and funding ARGA adequately.

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2 Comments

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