Why the UK government should scrap audit proposals
Proposals in the BEIS White Paper on restoring trust in UK audits sidelines existing institutes without any supporting analysis, argues Jon Moulton
The starting point for this White Paper is that UK audits are substandard, that poor audits are a major cause of corporate failure and not only is most of the current content of corporate accounting reports inadequate, but also swathes of additional material and ‘enhanced’ corporate governance are needed. Eight new bodies are proposed.
The paper follows three hopelessly overlapping reports from John Kingman, Brydon and the Competition and Markets Authority, with a bit of the BEIS Select Committee thrown in.
Virtually all the recommendations are taken up. Calculating how many actions are in the document is a bit subjective, but I reckon there are definitely more than 200. I’d guess that would mean adding another 20 pages to a LSE-listed company’s set of accounts. Finding competent staff to do this raises a whole new set of questions.
Just a cost
The paper comes with a 210-page Impact Assessment, which is entirely remarkable. As I’ve pointed out on numerous occasions in Corporate Financier, impact assessments should show estimates of costs and benefits. This tome contains not one single pound figure for benefits. It does have some roughly quantified guesses at some direct costs. The arrogance of pushing proposals forward without any supporting analysis is startling.
The few numbers in the document have been prepared using 2016 pounds. BEIS is seriously critical of the accounting profession, but cannot, it seems, produce a useful impact assessment supporting its own proposals. This is part of the same government that brought us such a fine example of financial propriety as PPE procurement.
The Latin Medice, cura te ipsum – ‘Physician, heal thyself’ – maybe applies, although another medical phrase could also be cited: ‘First, do no harm’. There is precious little evidence of need or the existence of a benefit over cost for nearly all the proposals.
The vast array of suggestions can’t be covered here. But the basic theorem that much of corporate reporting, governance and audit is inadequate and needs wholesale change does not survive any kind of analysis. Our UK audit profession may have its failings, but it is still arguably the best in the world.
Meanwhile, in reality
Corporate failure is largely down to directors’ actions and market environments – an auditor can do little to influence failure. Audit can occasionally flag up a coming failure and sometimes make a positive difference. However, unless we staff audits with people possessing outstanding skills of future prediction, the Catch 22 is that ‘flagging’ can precipitate greater levels of corporate failure. And fear of flagging will doubtless diminish entrepreneurial risk-taking.
The Financial Reporting Council (FRC) is to be replaced with the Audit, Reporting and Governance Authority (ARGA), which is to have hugely expanded powers, including intrusive regulation of audit committees, setting rules on distributable reserves, enforcing directors’ duties and many more enforcement powers. Where its staff are to come from is another mystery. The FRC recognises that its current staff rebadged as ARGA will not be enough and has already started recruiting in large numbers.
Most frightening for chartered accountants is the intention to set up “a new corporate auditing profession to operate independently of the professional accountancy bodies”. Existing institutes will be sidelined. It is far from clear that this move from a governing professional body to a civil service regulator will do anything good. Bodies dating back to 1854 are to be cast aside in favour of what will be a turgid, inflexible and inadequately staffed ARGA.
For existing members of ICAEW, a central pillar of their status will be dumped. There will be less incentive to join. This is an existential threat. We need to respond forensically. The Institute must argue strongly for substantial.