Five accounting regulatory issues to monitor in 2024
Five accounting regulatory issues to monitor in 2024
An overhaul of Companies House, scrutiny of behavioural misconduct and spread of AI will shape the year ahead for accountants, explain Julie Matheson, partner, and Ian Ko, senior associate, in the accounting services regulatory team at Kingsley Napley LLP
With ongoing economic concerns and the prioritisation of technological innovation in the financial services industry, 2024 is shaping up to be yet another year of risks and opportunities for both accountancy firms and their clients. Here are some key themes to monitor in the year ahead across the accountancy and audit regulatory landscape.
The (continued) rise of artificial intelligence
A 2023 Moore Global Study on Artificial Intelligence (AI) revealed that over the past year accountancy and financial services firms have made ‘above-average’ investments in AI tools, investing almost four times the amount of law firms.
In 2024 we believe accountancy firms at all levels (and not just the Big Four) will continue to embrace the development of their own AI systems in the provision of audit, tax and consulting services to clients - leveraging the ability of specialised AI tools to make better data-driven decisions and optimise operations.
Both the ICAEW and ACCA have also repeatedly highlighted the importance for accountants to upskill, ensuring that they stay at the forefront of evolving technological advancements.
However, with the widespread impetus to stay ahead in this digital disruption race, in 2024 regulators will increasingly be (and indeed already have been) paying attention to the ethical implications of AI use.
Aside from the often-discussed risks of AI, including the need to ensure non-biased/non-discriminatory algorithmic design, the potential for misinformation (AI ‘hallucinations’), as well as GDPR and data protection concerns, regulators will inevitably need to grapple with not only accountability where ethical breaches have occurred due to reliance on AI tools, but also how AI itself should be regulated where it encroaches on decisions traditionally confined to the professional judgment of accountants and auditors.
In the meantime, firms should be alive to their ethical obligations, including ensuring that they have created robust internal AI-specific policies alongside the development of AI tools (for example, policies addressing the ethical use of AI, data collection and storage, as well as data confidentiality).
Behavioural misconduct
With an increase in bullying and sexual misconduct complaints in the workplace, accountancy firms may also notice this year a corresponding uptick in regulatory action taken in respect of non-financial misconduct or ‘unprofessional behaviour’.
This appears to represent a general trend in the professional services industry. The Solicitors Regulation Authority (SRA) has amended its Code of Conduct to cover workplace bullying, harassment and discrimination, and the Financial Conduct Authority (FCA) has recently invited comments on its proposed diversity and inclusion consultation paper, indicating that the definition of misconduct extends to non-financial misconduct such as bullying and sexual harassment.
It is therefore unsurprising that ICAEW has launched a consultation (to close in February 2024) regarding a proposed amendment to the fundamental principle of professional behaviour in its Code of Ethics, which would prescribe the need for accountants to ‘treat others fairly, and with respect, and not harass, bully or unfairly discriminate against them’.
Notwithstanding the outcome of ICAEW’s consultation, it is clear that unprofessional behaviour will feature heavily on the regulatory radar.
Since June 2023, ICAEW-regulated firms now have a duty to report to the ICAEW any event which may indicate that it (or another ICAEW member) may be liable to disciplinary action.
Situations triggering the duty to report include ‘abusive, intimidatory or threatening conduct directed towards other employees’, ‘harassment (sexual or otherwise) of another employee’, or the inappropriate use of social media.
Depending on the nature of the alleged misconduct, firms should consider whether an internal investigation and/or independent advice regarding self-reporting obligations may be required. They should also make adequate preparations in advance, for example ensuring that there are clear internal procedures in place regarding handling of employee complaints.
Meeting recruitment challenges
One of the ongoing challenges in the accountancy market is recruitment. Some say increased legislative, regulatory and indeed public pressure on auditors may render the sector less appealing to newer entrants.
As the demand for skilled accountants and auditors continues to grow, firms must find innovative ways to attract and retain top talent, when there is increasing regulatory scrutiny on audits in particular.
The recruitment of skilled and experienced audit teams is key to ensuring regulatory compliance. This will require firms to not only offer attractive career development opportunities and competitive compensation packages, but also prioritise diversity and inclusion initiatives reflecting the changing demographics of the workforce and client bases.
ARGA – in spirit, if not in fact
With the exclusion of audit and corporate governance reform from the King's Speech late last year, the creation of the Audit, Reporting and Governance Authority (ARGA), the Financial Reporting Council’s (FRC) successor, appears to be presently on hold.
One of the key operational objectives of ARGA was to promote increased competition in the audit market. The FRC’s 2023 annual review on competition stated that the audit market remained highly concentrated, with the Big Four earning 98% of FTSE 350 fees.
The FRC has therefore indicated that in 2024, it will conduct market studies to investigate the way the audit market functions with better choice and resilience.
Interestingly however, the FRC’s newly-appointed CEO, Richard Moriarty, has suggested that the FRC’s priority was to ensure high quality audits and increase public confidence in the sector, rather than push for competition as an end in itself.
Accordingly, it will be worth monitoring the FRC’s tone throughout 2024, including whether its historically assertive approach towards increasing competition has been slightly moderated with the new appointment.
The Labour party, of course, has pledged its commitment to a more powerful ARGA regulator and strengthening of the audit and corporate governance regime, so if there is an election in 2024 it will be interesting to note their manifesto promises on that.
Overhaul of Companies House
The Economic Crime and Corporate Transparency Act 2023 (the Act) presents accountants and their clients with a wide range of new responsibilities. One key reform is the replacement of the ‘directing mind and will’ test for corporate criminal liability with a ‘senior manager’ test, significantly expanding the number of individuals through whom a company can be held criminally liable.
Another key reform relates to identity verification. Under the Act, to increase corporate transparency, any person registering a company or filing documents with Companies House must have verified their identity. They may do so either directly with Companies House or through an Authorised Corporate Service Provider (ACSP).
Accountancy firms will need to register with Companies House for ACSP status before being able to carry out identity verification checks on new and existing directors, Persons with Significant Control, and those filing documents on behalf of companies.
Relatedly, under the Act, the Registrar also has new powers to check, remove or decline information submitted to the Companies Register or information already held on it, as well as improved powers of investigation and enforcement.
Separately, small companies, including micro-entities, are now also required to file their entire profit and loss accounts, rather than only abridged accounts. The Act nonetheless does contain provisions permitting the Registrar to make such accounts (or parts of them) unavailable for public inspection, which may be useful where there are commercial sensitivity concerns.
With such widespread changes, firms should ensure they have a clear understanding of their obligations under the Act.
Overall, the year 2024 represents both risks and opportunities for the UK accountancy market. Investment in technological innovation, upholding ethical standards, addressing recruitment challenges, and navigating legislative changes will be key focus areas. Firms would be well-advised to carefully consider their commercial and compliance responses in respect of these areas.
This article was taken from the following link:
https://www.accountancydaily.co/five-accounting-regulatory-issues-monitor-2024
