Government inertia on audit reform is in danger of resulting in inadequate rules, an underpowered regulator and a reduced capacity to anticipate and address the next Carillion, ICAEW is warning.
Ministers’ failure to include the promised bill on audit and corporate governance in the King’s Speech means that long-overdue legislative and regulatory changes have no prospect of being implemented before the next election.
Nearly six years on from Carillion’s collapse, the government’s commitment to comprehensive reform underpinned by primary legislation remains unfulfilled, despite substantial and significant improvements delivered by both the regulator and the profession.
ICAEW is concerned that without primary legislation for proposed reforms – which were to include establishing a new regulator, the Audit, Reporting and Governance Authority on a statutory footing – the ability of the existing Financial Reporting Council (FRC) to properly oversee company directors will be severely compromised.
Huge effort and much goodwill has been invested in shaping the reform programme. As far as its current powers allow, the FRC has acted to strengthen regulation to improve audit quality. And for their part, firms have invested heavily in people, technology and methodologies to enhance audit confidence. However, despite three independent reviews, many public consultations and various policy announcements, the government has not demonstrated the political will to turn intentions into action.
Instead, a set of draft reporting regulations was unceremoniously scrapped last month by the Department for Business and Trade, after it described them as ‘burdensome’. They had included the requirement for companies to produce a new strategic report, a resilience statement and a directors’ report that includes an audit and assurance policy statement, a policy on material fraud and distributable dividends.
Meanwhile, the launch of a government consultation on Smarter Regulation is further fuelling speculation that the retreat from audit and corporate governance reform is a conscious decision by DBT to reduce rather than enhance regulation.
ICAEW Chief Executive Michael Izza has long expressed frustration at the government’s lack of ambition on audit reform and over the summer raised this issue with Minister for Enterprise, Markets and Small Business, Kevin Hollinrake MP, and Shadow Business and Trade Secretary, Jonathan Reynolds MP. Izza believes the current economic climate means that the lack of progress on audit and corporate governance legislative reform could pave the way for further corporate collapses.
“We won’t be able to handle the next Carillion-like event any better than we did the last one. And the pressures in the marketplace that the primary legislation was intended to deal with – oversight of directors, competition, quality – will remain unresolved. These are issues that will need to be tackled by a future government.”
Without primary legislation, the FRC cannot take on a bigger role in policing directors or introduce measures to increase competition in the audit market – such as the proposed implementation of managed shared audits for UK-registered FTSE 350 companies.
In its submissions to the Kingman and Brydon reviews and Competition and Markets Authority market study, ICAEW has repeatedly warned that momentum on audit reform is in danger of being lost, despite being vital for investor confidence.
“Instead of being able to speak with international investors about how the UK’s corporate governance is well suited for the opportunities and challenges of the coming decades, businesses have instead been waiting for the government to find the parliamentary time to deliver its audit reform legislation,” Izza says.
“Reform needs to centre on restoring public trust in the profession and ensuring it evolves to better address the needs of wider society – investors, employees, pensioners, suppliers and customers. Audit reform is about building companies’ resilience so the public can have confidence that businesses – big and small – are well governed and able to create and safeguard great jobs, offer high-quality products and services, and deliver economic growth.”
Having long been a leading voice expressing frustration at the lack of tangible progress on audit reform, ICAEW has welcomed more recent cross-party political support for its stance, after MPs and peers last month wrote to Prime Minister Rishi Sunak urging the government to include the Audit Reform Bill in the King’s Speech.
The cross-party letter, coordinated by the Chartered Institute of Internal Auditors, warns: “For the audit regulator to have clout and transition to the new Audit, Reporting and Governance Authority, it needs to be put on a statutory footing with the legal powers to do its job effectively.
“No government can prevent all companies from collapsing, but it should put in place a robust audit and corporate governance framework to support boards to manage their risks effectively and promote the interests of investors. This action will help deliver greater economic resilience and serve the wider public interest.”
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