The UK government recently issued a white paper aimed at restoring trust in audit and corporate governance. Pete Hine, Frazier & Deeter’s Lead Audit Partner in the UK, provides a perspective on the publication. In particular on ‘UK SoX’ and how Frazier & Deeter could help.

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Untangling the Technical : UK Audit Reform

This transcript was assembled by hand and may contain some errors.

It has been edited for readability.

Adelle Starr Hello, everyone, and welcome to Untangling the Technical, Frazier & Deeter’s podcast, in which we take a look at complicated topics to break them down for people navigating today’s ever-changing regulatory environment.

This is Adelle Starr. And today, we are excited to have with us the leader of our UK Audit team. Pete Hine is a Partner in our London office, where he works with clients across the UK and internationally to perform audits under various accounting standards. He’s joined the podcast today to talk to us about a critical discussion that’s underway in the UK regarding restoring trust in audit and corporate governance. Pete, welcome to the podcast.

Pete Hine Hi, Adelle. Lovely to be here.

Adelle Excellent. So, this is a pretty big topic that’s emerged in the UK. Where shall we start?

Pete Well, perhaps some might find surprising, I think we should start with ants. Over the lockdown in London I’ve listened to a lot of Radio 4, which is quite a normal thing for me to do. They had a lovely program on there recently about ants and it talks about the fact that when ants are in a stable environment, they take the same routes and use the same paths and structures on a regular basis to get to the same places in their environment.

But it really stuck out to me that if that environment is disturbed, and even after that disturbance you go back and put everything else back exactly where it was before, the ants actually find a completely new way of doing things and use completely new paths after what’s happened and they then just revert back and go back to what they did before. And I strongly suspect that that is going to be exactly the same for us in a world post COVID where we’re all starting to return to work. You might be thinking, well why is that relevant to this conversation?

Well, I think you have to think about the context, that this guidance comes into. We are in this period post pandemic and it’s caused a huge disruption to people in their lives over the past 15 months and I think how we work is going to change. There is this shared sense in the air, very mixed emotions between sort of exhaustion and an optimism and ultimately the success or not of these recommendations and then the corporates themselves. It’s going to come down to people and how much capacity those people have and how much energy they have to properly consider what’s happening. We need to recognize the capacity that people have to jump on these right now is pretty limited, so there’s an argument. The clock is ticking, though, and we’ll come to that in our discussion today of when these things are actually going to need to be implemented. And there’s probably an argument of actually doing some of these things, and thinking about the now could be beneficial, but we shouldn’t forget that there is quite a lot of change in the air outside of this particular report.

Adelle That’s certainly true. It’s the biggest change of our lives, this whole experience we’ve been through, but let’s talk a little bit about what exactly is the background for this consultation paper that the Government issued. Could you explain it to us?

Pete Yeah, absolutely. So, broadly speaking, it’s a list of measures that are very large enlisted corporates as well as auditors. It’s 232 pages long, asks 98 questions and it’s part of the consultation period that the government in the UK set off that lasts until July. The title of the paper really references back to some of the large corporate failures that we’ve had here, such as Carillion and VHS, and there’s been three reviews into this space previously, the first one by the CMA, the next one by Sir John Kingman and then one by Sir Donald Brydon. Really, this white paper combines all of those recommendations into a single set of workable ideas, if you like, with implementation being phase to 2023 and beyond. If you look at the report itself, it has 11 chapters based on different topics which include director accountability for internal controls, the chapters around audit scope and audit competitions, and then just three. But I think it’s worth saying that it’s a long and technical consultation in an age where I think a lot of this has become brave enough to want things in a quite simple and understandable way. So, I wouldn’t hold it against anybody listening to this not to have read the entire submission.

And I think that’s why it’s important as well for firms like ours to give a view and some insight into what it’s all about. Quite easy, I think, for us to get quite focused on the technical areas and the narrow lens of what we do on an everyday basis and start thinking about, well, we welcome the report, what’s happening, how it impacts us as people that use these types of areas on a regular basis. But really, what we’d like to do is try and give some practical advice to our clients of what we’re thinking of doing, how will we do it and when will we do it. And perhaps the best, most obvious focus for us to think about today might be the SOX point controls and accountability of directors.

Adelle Excellent. You mentioned directors, which as an American, that makes me think of Sarbanes-Oxley. What does the report say about SOX?

Pete Well, it’s basically talking about a UK version of SOX. There are three potential options in the white paper. One talks about a director statement and attestation which is around the director’s confirming the controls are in place and have been operating effectively throughout the year for their organization. There could be further steps to that with the auditor giving a specific view of controls in their reporting or even an audit formal assessment in the way that there’s an audit report which is specific to the controlled environment that exists in the US. But the mood music is that as a minimum, there’s going to be this director’s statement. And for those directors who are making that pledge, if you like, in the account of personal accountability, and those people want to be sure that this is accurate. And the question really is, well, how hard is it to make a statement that the controls are in place of them operating effectively?

I think in my mind, I should imagine a scenario where you’ve been asked to go climb the mountain, maybe called Mount SOX, and you might think, well, I haven’t heard that, but I have heard of Everest. So, I know I’ve got to go out. I’ve got to get a trainer and get some serious mountaineering gear, set aside half of next year to pursue my training on this and really think about it seriously. Or you might think, well, I haven’t heard of Mount SOX, but I’ve heard of Mount Snowden in Wales. And actually last year I climbed that with my family in my flip flops, so there’s pretty much nothing that I couldn’t do. And it could be sort of anywhere in between those examples, if you like. But I think the reality is that you need somebody who’s climbed Mount SOX before, in different weather conditions and different starting points and really understands it well to help you get prepared and ready for your own journey.

I think that initial assessment of where you are and where you need to be can be done now, especially considering that there will be companies in the UK that are dual listed between UK markets and overseas, in particular, dual listed in areas like the US and perhaps Japan, where SOX has been going for a long time. And that equivalent really points to the fact the experience in the US marketplace and how SOX is done there is going to be very relevant to what’s going to happen in the UK journey through implementing SOX.

Adelle Yes, I think that’s a great analogy, I love the idea. SOX is not a mountain to climb in flip flops that’s for sure. I think that the perspective that anybody who’s worked on in J SOX or a SOX environment is going to be really helpful as the UK goes through this process.

Pete, how do you see Frazier & Deeter’s team as adding value under the scenario?

Pete Well, I think it’s interesting, if you look at the UK marketplace, actually, 97% of the FTSE 350 audited by the Big Four accountancy firms here. Outside of that, it will be a bit difficult to find the expertise and independent fresh views, if you like, on how you go about this, because there isn’t that much experience here in the UK. And I think our experience in the US, Frazier & Deeter, is going to be highly relevant. If you overlay on that, the model that we have, which is slightly different to the normal network firms and the fact that we can use that expertise directly in the UK and the ability of UK clients, as well as being quite agile here to jump on to problems and scale our solutions to what clients needs to do. All of those things combined, I think could be quite useful for clients, for people implementing these recommendations.

Adelle What do you see as the next steps for our Frazier & Deeter UK team as our clients and the entire UK business community goes through this process?

Pete I think the first thing to think about, is what experience that we have and how would we apply that to our clients facing what they are today. And perhaps if I go back to the example that we talked about right at the top, I think if you imagine a colony of ants, it’s quite easy to picture the society and the individual ants working towards the same objectives. If you think about corporate reporting and legislation, that journey is a bit harder. But actually, if you have a simple flow, beginning with society at the very top and clearly society are interested in corporate reporting because of the outcry about corporate failures, which leads to government reviews and new regulations, then directors and managers of companies have to implement, which then gets to the staff and the individuals implementing them.

Actually, there’s not many steps there between what society needs and what the individuals need. And for those people who are doing it, especially in the context that we’ve talked about, at a minimum, they’re going to need to know, well, what do I do, how do I do it and why am I doing it? That’s really the area where our experience comes in because that area why are people doing this is so crucial and the tone from the top is critical in making the organization understand what is it that we’re doing? Why are we doing it and why does this need to be successful? If you’re a director or a manager that’s trying to give that term from the top, the first piece you need to do is understand, well, where are we now and what do I need to do and what sort of materiality of measures do I need to introduce in order to make sure that we don’t overdo it, but we do get to the right level of control.

So, that’s a short snippet, and it’s going to be very different and needs to be tailored to specific organizations. But I think getting in there, doing the initial assessment, understanding how do you generate that tone from the top, is a crucial piece that we’ve learned from our experience and could help UK clients with.

Adelle Pete, what do you see as the next steps as we move forward?

Pete Well, the next steps for us will be continuing to go through the process of this white paper and the feedback is being sought on the specific questions until July. We’ll be looking more in-depth at some of the other chapters in this document and thinking about recording more podcasts like this. And of course, we’re absolutely available to talk to anybody that is looking at these recommendations and thinking about what their next steps should be and to give them the benefit of our experience going forward.

Adelle Excellent. As somebody who remembers the environment in the US in the 18 months or so after Sarbanes-Oxley started, it was quite an adventure for the entire business community in the US, and I do think that we can help with some of the insights that we culled from that period, absolutely.

Well, Pete, I want to thank you for taking the time to be on the podcast today and we look forward to a future edition as the situation continues to evolve. And to our listeners, please subscribe to our podcast so you don’t miss the next edition of Untangling the Technical.