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In this Insights In Focus episode, we discuss the future of audit and corporate governance reform.


Philippa Lamb  


  • Iain Wright, Managing Director, Reputation and Influence, ICAEW  
  • Darren Jordan, Partner, Moore Kingston Smith  
  • Maria Kepa, Director, Corporate Governance, EY  


Philippa Lamb: Hello and welcome to the Insights In Focus podcast. I’m Philippa Lamb. Today we’re discussing the future of audit and corporate governance reform. 

Now, you may remember that back in May 2022, after years of reviews and consultations, the government finally announced its plans for audit and governance. The key proposals included the creation of a new regulator, a wider definition of public interest entities and ensuring that FTSE 350 firms would not be wholly reliant on the Big Four when it came to audit. But nearly two years on, very little has actually changed. Corporate governance reform was quietly dropped by the government last October and audit reform was notably absent from the King’s Speech the following month. So what happens now? 

To sketch out a possible future I’m joined remotely by Iain Wright, ICAEW Managing Director of Reputation and Influence, Darren Jordan, Partner at Moore Kingston Smith, and Maria Kepa, Corporate Governance Director at EY. Hello, everyone. 

Before we talk about the future, shall we just quickly recap on those reforms proposed in 2022, Iain? The ICAEW was largely supportive at the time, is that right? 

Iain Wright: That’s right. Philippa, yes. As you said, this has been years in the making. And the announcement from the government in May 2022 had a package of measures included in corporate governance reform. I think that’s quite important, because if you focus on one particular element, the whole nature of an ecosystem regarding what makes a good company, and how do you protect investors and stakeholders – that sort of falls away. Maybe we can talk about that during the course of our discussion. But yes, in broad terms the package was in the right place. In May 2022, the government was proposing to set up that new strengthened regulator, moving away from the Financial Reporting Council, FRC, to ARGA, or Auditing Governance Reporting Authority, with the very clear objective to protect and promote the interests of investors and other users of corporate reporting, making large companies’ reporting more useful in terms of what they’re doing about making sure that their company is viable in the long run; putting more information out there in terms of what risks to a company the boards and management have been assessing; strengthening reporting about companies’ internal controls, and making directors of the country’s largest companies more accountable for their actions. As I said, we at ICAEW were broadly supportive of that holistic package of reforms designed to really inject greater trust and viability into the corporate reporting ecosystem. 

PL: Darren, Maria, what did you make of the proposals as professionals in the sector? Are there any elements you’re concerned by, Maria? 

Maria Kepa: I think mostly, Philippa, what Ian said about the holistic approach is most important, because it’s not so much about dwelling on the details of any individual proposals but the fact that, in totality, they made sense, they went in a certain direction. For me, what’s always been important is making sure that we have the strengthened regulator that applies both to audit firms but also to the corporates, at the same time as new reporting requirements, because it’s only then that those requirements can be appropriately, for lack of a better word, policed. 

PL: Darren, what’s your feeling? 

Darren Jordan: You need a whole holistic approach. So looking at both the auditors, management and board governance, as well as the reporting, all facets need to be moved forward. That was what was good about what was being proposed. 

PL: But Iain, as I said, last October we saw some of the corporate governance reforms scrapped. That wasn’t a very encouraging sign, was it? 

IW: No, I mean, this has taken an awfully long time. Some of the corporate scandals that precipitated a whole range of different reviews about audit and corporate governance, that was something like six, seven, eight years ago. I mean, this is an awfully long time. And some of the reforms that were proposed have been scrapped or diluted, some are not being taken forward. In many respects, this is both frustrating and challenging in terms of how do various stakeholders – auditors, company directors, investors, other stakeholders – how can they take things forward? That dilution and scrapping and the length of time reform has taken been incredibly frustrating. 

PL: Having said that, Maria, in the week we’re recording we’ve just had a new corporate governance code. Which bits of the original proposals made it in and which didn’t? 

MK: Effectively it’s only the code changes that have made it in, everything else, as Ian pointed out, has either been withdrawn or postponed. The changes to the code are pretty much limited to the aspects relating to internal controls. There was the ambition to increase director accountability over internal controls beyond financial control – sort of all controls that are material to corporate – and that new declaration has found its way into the code. 

PL: Iain, nonetheless, we are nearly two years on from the original announcement. What’s your feeling about why we haven’t seen more progress? Is it all about political turbulence? 

IW: Yes. Well, partly – to contradict myself there, Philippa. It reminds me of… Harold Macmillan, former Prime Minister, used to say quite frequently apparently: “Events, dear boy, events.” And I think there was a real… there was a general broad enthusiasm from the government in terms of, we’ve had a consultation on the back of these reviews and this is what we’re going to take forward. I remember vividly reading the consultation response paper from the government where they were saying… where you saw overwhelming positivity for the likes of the new strengthened regulator to be established. 

Government had said at the time, there’s an overall positive response to the case for reform and continuing in that vein, but I think we had both domestic politics and international events overtake things, Philippa. The aftermath of the Russian invasion of Ukraine, particularly in terms of difficulties with the supply chains, the spike in inflation, that had a major impact, particularly in the field of energy. If you look at what… it’s gone through various iterations, but the Department for Business in Whitehall, what it was really looking at is how on earth do we deal with energy inflation? How do we deal with price rises and dealing with customers, both domestic and industrial, having to deal with this massive spike in energy costs? That took a lot, an awful lot of energy, literally. 

Then there was domestic considerations. The government consultation response came out in May 2022, as you said, and of course in July 2022 Boris Johnson, then prime minister resigned, and then you had a summer of a Conservative Party leadership, and then you had the Liz Truss administration, which lasted less than two months, and then a new election campaign. So there’s been a real degree of volatility globally as well as domestically. And that’s just taken time away. It’s a case of prioritisation politics. The art of governing is always about priorities, and when you’ve had an invasion of a state in our own continent and massive increases in inflation, the likes that we haven’t seen for 40 years, and the removal of a prime minister, that takes precedent. 

PL: As you say, it’s all about priorities, isn’t it? But now we’ve got an election fast approaching, this is hardly a vote winner for the general electorate, is it? Presumably we’re unlikely to see much movement on this from the current administration before an election? 

IW: I should imagine the good people of Rochdale and Wigan are not going to be talking to their candidates about audit and corporate governance reform. In that regard, it does go down the list of priorities. That said, Philippa, the idea of growth… the reasons why some of the reforms have been scrapped or diluted, the argument is, is it a burden on companies at a time when we’re needing growth? I think we need a series of podcasts on what do we need to kickstart growth in the future? 

There’s a point about regulation there. 

I think there’s a wider point that actually voters – the electorate – do get, which is, is my standard of living increasing? If it’s not, why not? And how is it that business and government help improve my standards of living? Are we competitive as a country? Are we productive, which means that living standards increase? And all that gets into the mix about, really, does the economy work for me, my family, my community and my country? I do actually think that audit and corporate governance reform does lend itself to what do we want to be as a nation in terms of our international competitiveness, our trustworthiness, so that investors can come with confidence to invest in our country’s companies? 

PL: Well, indeed, I want to get into the potential risks of not doing this in a bit. Before we do that, Maria, in fairness we have seen a bit of progress, haven’t we? The Economic Crime and Corporate Transparency Act – that brought in this failure to prevent fraud offence. What about reporting requirements around material fraud? 

MK: That original suite of proposals included something that was referred to as the statement on the measures taken by directors to prevent and detect material fraud. That was going to be quite broad, because it would relate to all fraud that is material to the company. The failure to prevent fraud offence is slightly different. It focuses on fraud committed by a company or by persons associated with it. So it doesn’t relate to the fraud that a company suffered, so to speak. But in effect, it also requires directors to make sure that they have controls in place and are taking the right steps to make sure that the businesses they run don’t perpetrate fraud. And that definition of fraud is very, very broad. It will include things like financial reporting fraud – greenwashing, for example. That aspect, whilst taken out of the original UK corporate governance and audit reform agenda, has found its way back, maybe in a slightly roundabout way. 

PL: Looping back to Iain’s point about the risks associated with not getting this done… we all remember the collapse of Carillion. It was only six years ago. It was the catalyst for initial action by the government. The lessons of that collapse and everything involved in it, they haven’t been addressed. We’re not unlikely, I think it’s fair to say, to see another such collapse. So I’m interested to know what you all feel the risks that uncertainty poses are, for business, the profession and, as Iain said, the wider economy. 

Darren, what’s your thinking? 

DJ: I suppose, looking at it from our firm’s perspective to start with, we’ve been investing in audit and audit services so that we can provide an alternative to certain businesses for audit from the Big Four. Lack of certainty as to what the size of that opportunity is, is naturally going to limit how much we invest in providing and being an alternative to perhaps more of those larger entities, which are predominantly with the Big Four. In that sense, the lack of certainty was always going to slow the pace of change, which is definitely one aspect of this. And if we’re thinking this, then plenty of other firms in a similar position to us will also be thinking the same. 

From a business perspective, it’s interesting. I always have a wry smile about the growth agenda, which is quite an emotive phrase and seems to lead you to minimal regulation. But capital markets do rely on good quality information. Obviously where we all started with this is competition is good, having as much competition as possible helps to provide a competitive balance and to make sure that quality is there at a good price. That piece isn’t really being moved forward, and that’s going to be a consequence of a lack of reform. 

PL: Is that being reflected in the cost of professional indemnity insurance? 

DJ: [laughs] Yeah. 

PL: Presumably it is. 

DJ: Yes, there are a few factors. There were some insurers coming out of the market at a time when there were some big claims being made. PI insurance costs were increasing. I think they’ve stabilised now, but they’re still a lot higher than they were and audit is still regarded as a risky service. 

PL: Maria, presumably it’s also making audit a bit less attractive to recruits, is it, this uncertainty – this cloud really, I think it’s fair to call it – hanging over audit? 

MK: I think generally audit has a challenge with the attractiveness of the profession. Whether or not these particular aspects contribute greatly to that existing challenge, I think it’s very difficult to isolate that. But I think what isn’t helpful in terms of attractiveness is this imbalance that we currently have around accountability. Philippa, you mentioned Carillion earlier on – if I take that as an example, those who have been following the media will know the extent to which the auditor was fined for the situation that had arisen, or their participation in that situation, versus the accountability of directors. I think the problem we have as a profession, which impacts people wanting to join, is very often how auditors are portrayed in the media as those responsible for these collapses, and maybe without sufficient acknowledgement of the role that directors played in their actual governance, oversight and supervision. Which is why, going back to what Iain was saying in response to your question about what are the consequences, the consequences are also on those people that are voting in the elections. They might not directly realise this, but these big corporate collapses often then result with unfunded pension schemes or with pension schemes losing out significantly as companies go under. It’s not a direct link people necessarily make. But that is also one of the reasons why these reforms are needed. 

PL: The same presumably would apply to the… I think, what Ian was talking about was the reputational risk to UK plc as a place for legitimate business. That has financial consequences across the piece, doesn’t it? Economic consequences? 

MK: Absolutely. 

PL: Iain, it does sound likely we’re going to be stuck in limbo for at least another year. What are you currently hearing from ICAEW members? I’m interested to know – I know you talk to politicians all the time – what you’re hearing from Labour, as a potential new administration, what they might choose to do in this area? 

IW: I think Darren articulated the concerns of business and our members very well, which is, as much as possible, businesses want certainty. In a volatile, uncertain world it’s very difficult to achieve that. But in terms of government proposals, about legislation, about regulation, set the path, give businesses sufficient time to be able to decide how they’re going to deal with that, invest, divest, whatever, but give that clarity and that roadmap, and then businesses are good enough and agile enough and entrepreneurial enough to deal with that. I think that’s what is needed. Clarity, certainty, a clear roadmap. So that is… should be the fundamental principle of government economic and business policy. 

In terms of if there is a change of government after the next election, when I’ve spoken to the Shadow Secretary of State, Johnny Reynolds, he says audit reform is still a priority for him. I think, the first 100 days of a Kier Starmer government, I think there will be emphasis elsewhere, let’s say. I think, again, politics comes down to priorities and I think there will be much more emphasis given to tax reform in the economic space, but also it will be about NHS and education policy. And to some extent, infrastructure policy will be the hallmarks of that first 100 days of a Starmer government. But an audit reform bill could be coming down the tracks in the second or third year of the next parliament. 

PL: But do you think the Labour Party shares the Conservatives’ anxiety about this being perceived as burdensome for business and therefore tricky to get heavily involved in? 

IW: I think that’s a really important, profound point. And I think there are different stakeholders with different perspectives and the job of government is to try and balance some of those different perspectives and different tensions. 

I think, traditionally, the last 20 or 30 years, UK plc has benefited really well from that principles-based approach – that ability to flex and be agile when circumstances determine, particularly in terms of corporate governance. The Corporate Governance Code is a really good example of that. And I think investors from around the world have traditionally, in the last three decades or so, really valued the UK’s stance on regulation to attract investment. We have benefited as a result of our good, smart regulation and that should continue in the 21st century. 

There are others who think, do you know what, regulation is a real burden. If you look, we’ve been talking about audit and corporate governance reform, Philippa. If you look at the sentence… the headline on the press release from October 2023 from the Department for Business and Trade, in terms of how they push this, I think they say, “burdensome legislation” or “burdensome regulation”. It’s very clear where they’re coming from in terms of that. Some people think you just reduce, if not eliminate regulation and those seeds will flower into bountiful harvests. It’s where you come from and it’s striking a balance. I think actually we have benefited from smart regulation, not non-regulation. 

PL: Maria, do you agree? Is it a bit about optics for all parties here, about how it looks, how business perceives this new regulatory environment? Is that what’s causing hesitation? 

MK: I think all politicians don’t want to be seen as those that impose burdens that can hinder growth. But I think ultimately, what needs to happen is there needs to be a commitment as to the vision that the UK wants to strike longer term. We are now seeing this move to consider how we can potentially deregulate; if not, at least not introduce new requirements. In the background we have the Financial Conduct Authority as consultation on primary market effectiveness that is also seeking to reduce some of these burdens on companies listed or seeking to list in the UK. So that’s a lot of deregulation.  

There’s voices there about the degree to which investor protections are being potentially decreased or diluted. But we have to be thinking about that in the context of the directors’ accountability regime in the UK. So on one hand, if we’re not increasing directors’ accountabilities, we might want to counter that with more reporting requirements. If we’re diluting certain shareholder protections, what are we introducing instead to give them the level of confidence that they had? Because while obviously I completely and utterly agree with Iain in terms of how the UK has been perceived over the last two or so decades in terms of smart regulation and being a good place to invest, I think a big aspect of the debate that is ongoing now is as a result of reducing interest in listing in the UK, reducing levels of liquidity in the market. So I think something needs to change. 

PL: Darren, what do your clients say about this? Do they see value in these potential reforms? 

DJ: I was just having a wry smile at Maria’s last statement there about the access to capital and the reduced liquidity. Part of my role within my partnership is to deal with our global network and so I am regularly talking to businesses, advisors, in other jurisdictions, other continents around the world. 

PL: And what do they say to you? 

DJ: Coming to what I think both Iain and Maria were saying is that the UK is still well regarded. But it hasn’t gone unnoticed, as Maria was saying, that there has been reduced liquidity, there has been reduced activity in the capital markets in the UK. Now I don’t think audit reform is a driver of that as such… 

PL: Not directly. 

DJ: Not directly. But it’s all part of, as Ian was saying, smarter regulation. That’s why the UK is well regarded, because it has a good balance with the way that it generally regulates. 

We’ve had a lot of political instability, pretty much since Brexit… the vote for Brexit in 2016. That has hurt the UK a lot. Business wants stability, business wants clarity. And that is going to be the biggest… that’s the biggest driver as to whether international businesses, international cash flows, engage and use the UK as a place of business. 

I think Ian mentioned earlier, that does directly affect individuals’ pay packets. I think it’s fairly well known that the pay packets of those in international businesses are usually higher than those in smaller local businesses. It does affect everybody. It does have a wider influence. And so there does need to be some movement on this. But it’s part of a whole package of… not just audit reform, there’s how do we improve the liquidity of capital markets? How do we ensure there’s more appetite for investing in riskier businesses? Because that part of the holistic view hasn’t been mentioned so far and is also part of what we need to address going forwards. 

PL: Maria, is that reflected at EY, what Darren’s been saying about how his clients perceive this? 

MK: Yes, I would say so. I think it’s a very accurate description of what’s going on. But there’s maybe an additional perspective in response to your question that is maybe slightly smaller scale. 

You asked, do companies see value in some of these things that have now been withdrawn? I’ll be honest with you, when I saw the government’s announcement withdrawing the secondary legislation and this focus on burden I was a little bit surprised, and probably for two reasons. Firstly, that original government response that Iain has mentioned, that already had noted these sorts of concerns from business – that this is going to be costly, that this is a burden. But yet it had decided to move forward. Now obviously the landscape has changed, and we had all of those events that Iain helpfully reminded us of, but the fact that this was going to be costly and burdensome was nothing new. But then at the same time, because this has been going on for such a long time, many companies had actually started preparing for these new requirements, wanting to be good citizens, wanting to get ahead. And many of the businesses… 

PL: Investing in the process? 

MK: Exactly, right. So many of the businesses that I had been speaking to, for example, about the audit and assurance policy, they had told me that either they had ongoing projects or that they had actually already drafted an audit and assurance policy, were just not disclosing it and keeping their cards close to their chest. But all of them were saying that actually they were finding the exercise really useful. It was giving them a stronger focus on what they disclose and potentially removing certain disclosures, looking at how various types of assurance had been layered over years and realising that maybe in some places they don’t need both internal and external assurance over the same area, and being able to redirect resources or reclaim some resources. 

There was an element where I felt there is definitely value that you can realise from these requirements, as long as you approach them as something that can be good for business, as opposed to sort of a box-ticking exercise of “I have to disclose this and I really don’t like the fact that I’m being made to do it.” 

Just the other day, The Investor Forum published its 2023 annual review and they were conducting these stakeholder dialogues. And in that there was an interesting dialogue between audit committee chairs and investors. And actually this point around veracity of information that is being disclosed is one that’s really important to investors. Companies being able to articulate how they approach assurance beyond your statutory audit, I think remains a really important point. 

The reference to Brexit, obviously, and everything that is happening in the EU in terms of sustainability reporting – that will all come with assurance requirements. So again, if we want to make sure that we don’t get left behind and don’t suffer greater risks of greenwashing allegations in terms of some of these sustainability disclosures, I don’t think this is an area that companies can just say, well, the regulations haven’t gone through so let’s forget about it and let’s just move on. 

PL: Iain, that’s interesting, isn’t it? Business understands the necessity for this, it’s acting regardless of government slowness. In our last podcast, you mentioned ICAEW is going to be delivering a manifesto to the major parties ahead of the election – what are you going to be saying to them about audit reform? 

IW: Well, I think it’s tied up in that wider point about how do we improve the productivity of our country? Because it’s really the only way in which you can improve living standards. How do you ensure that we as an economy become more resilient, and that we take advantage of some of the big forces that can either propel us into prosperity or push us down into decline? I’m thinking about technological innovation, particularly in terms of the rise of artificial intelligence, and I’m talking about sustainability, and how do you deal with the transition to a net zero economy. 

I have to say, Philippa, I agree with every single word that Maria said. And I think if you look at some of the things that good companies already do, and are starting or developing, the two elements of the reform package that I will really cite: the resilience statement, which is looking at risk – what are the things that might batter us as a company in a year’s time, in five years’ time, in 10 years’ time, how do we need to adapt to that? That is good corporate governance, thinking about identifying and dealing and mitigating with your risks. And the other thing is the audit and assurance policy – where are the areas that I as a board, we as directors, need assurance? Financial statements is the obvious one, but increasingly so, a big opportunity and threat is sustainability. Can we make sure that we don’t have greenwashing, because that will undermine trust in our company amongst investors? Do we need to do something about AI assurance. A good audit and assurance policy… as Maria said, this might be just an internal thing rather than disclosed to the capital markets. But good companies do this. The real tragedy, I suppose, of the dilution of the reform package is good companies are going to do it anyway, regardless, that’s what they do. Those sort of middling companies that could have had injected into them an element of scrutiny, good risk identification, might have kept them going, might have stopped them going under in the face of global change, that’s going to be lost. And that’s the real tragedy: that you might see companies that could have maintained themselves with good corporate governance perhaps topple over. 

PL: Darren, does that chime with you?  

DJ: Yes, it certainly does. I think, as Maria said, if the investors want this, because it’s their money that’s on the line, then I think that will start to become more of the norm. And then what generally starts at the largest businesses does tend to trickle down. So hopefully, we can move forward, but I suspect it will be the money that drives the moving of this forward because it sees the benefits of it. 

PL: Yes. Obviously there is some consensus at Westminster too – I think there was a cross-party letter delivered to the PM last October, wasn’t there, urging movement on audit reform. So it does sound from what you’re all saying that there are pockets, if I can put it that way, pockets of consensus on this, both in Westminster and in business and the wider economy. Would that be fair to say, do you think, Iain? 

IW: I think you alluded to it earlier on, Philippa, we are in a very volatile world, and we’re probably in a different world to when, say, Carillion took place. Given inflation, relatively weak anemic economic growth, greater volatility geopolitically, there’s more chance of a major high-profile corporate brand, corporate company going under. And then you will get the same sort of questions, like where were the auditors in all of this? And you might get another knee-jerk response from a future government about audit reform. That knee-jerk response would be a shame and a missed opportunity when actually, in the last five or six years, there’s been a good, considered holistic response to the challenges about how do we inject greater trust into our capital markets? How do we make sure that we don’t see unexpected failure from companies? Companies fail in a capitalist system – that’s just part and parcel about what happens. But unexpected failures – and how do directors, investors, and indeed auditors, play their part in making sure you can have a strong, robust, resilient and ultimately trustworthy system? 

PL: It’s a fascinating subject. I think we’re going to have to wrap it up there, but thank you very much, everyone. Obviously we will keep a close eye on developments in audit reform and governance as and when we see any more. 

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