Spreading corporate governance reform too thinly risks losing focus

In its upcoming response to the BEIS consultation Restoring Trust in Audit and Corporate Governance, ICAEW will say that the time is right to press ahead with long-lasting and meaningful reforms to the UK’s corporate governance and audit framework. This will ensure investors and other stakeholders have access to high-quality, focused, transparent and reliable information on UK companies. 

“Reinforcing reform in the stewardship of those most significant companies upon which investors, employees, supply chains and large parts of the UK’s economic base relies is also a necessary pre-requisite in helping to restore trust in business,” ICAEW’s submission to the consultation states. 

However, ICAEW argues that strengthening, rather than rebuilding, all parts of the corporate reporting system would be the best approach to ensuring it remains world-class. Fraud and unexpected failure in Britain’s most important companies should be the focus, ICAEW argues. 

Iain Wright, ICAEW Managing Director, Reputation & Influence, said: “We have a strong reputation around the world in professional services, accountancy firms and corporate governance as a driver of inward investment. In the face of challenges and corporate failures, government rightly wants to maintain and enhance that competitive advantage. In some significant ways, the White Paper suggests unnecessary demolition of successful parts of the corporate governance and audit regime, which risks wrecking the entire ecosystem.”

“Focused attention on those measures which strengthen the ecosystem and provide better operation of early warning systems should be the priority,” Wright added. “Spreading reform too thinly risks losing focus, puts unnecessary pressure on capacity, blunts impact and causes damage along the way”.

While business failure is painful, it is an inevitable component of a functioning economy. Fair, balanced and reliable corporate reporting helps highlight risk and acts as an early warning system. 

Audit reform under the spotlight

Meanwhile, audit too has a vital role to play. While auditors cannot prevent corporate failure, they must help ensure financial statements can be trusted, ICAEW says.

Audit reform is under the spotlight as a means to avoid corporate failure, but auditors should not be blamed for the failings of company directors, ICAEW argues. “Corporate failure is caused by the action, or inaction, of company management, not auditors. Invariably, this is not deliberate sabotage, but management failing to respond adequately to the needs of customers or taking excessive financial risk, both factors that should be properly controlled against and visible in corporate reporting when they occur,” ICAEW’s submission states. 

Government should prioritise steps to ensure management accountability for robust controls that ensure corporate reporting shows a true and fair view of a company’s position and help to guard against fraud, ICAEW adds.

ARGA objective needs to be better targeted

ICAEW argues that multiple checks and balances by different parties are more effective in protecting against fraud and unexpected failure than the efforts of a single regulator. It warns there is too much emphasis on the role of new regulator ARGA in restoring trust and argues that professional accountancy bodies including ICAEW are central to delivering reform, reinforcing the UK’s comparative advantage and driving up standards of behaviour. 

John Boulton, Director of ICAEW Technical Policy said the government was right to focus on unexpected failure and fraud that undermines the financial statements of those very large entities that have a significant impact on UK society. 

“We need a regulator that is specifically tasked with high-quality reporting that gives greater visibility into the resilience of the largest businesses that are in the public interest. But we are concerned that the White Paper strays into areas that are going to distract the regulator from achieving that core objective,” Boulton said. 

Boulton said the scope of Public Interest Entities (PIEs) was too broad and could draw in too many companies that are not in the public interest. He also warned that new regulator ARGA would be tasked with powers in areas that were ancillary to achieving its core objective, particularly around the statutory regulation of chartered accountants. 

“The objective of ARGA needs to be better targeted. In our view, the regulator should be focused very specifically on duties for accounts, reports and audit. Those are in Part 15 and 16 of the Companies Act 2006 and it is here the regulator needs to focus,” Boulton said. 

ICAEW has highlighted its desire to work proactively with government, business, and the regulator to address weaknesses while enhancing the international competitive advantages of UK businesses, capital markets and professions.