Labour to moderate plans over statutory auditor for the financial sector

Labour would likely moderate its plans for a state-backed audit body to the financial services sector should it take power at the next election, according to a source close to the party.

This would include “tailoring” its radical plans to nationalise audit in the UK to take into account the changes to the Financial Reporting Council and the “turbulence” of public awareness of audit in the press. As a result, Labour would likely concentrate on other nationalisation plans post-election before it would to take any action on audit, FS Focus understands.

At an event in the city at the end of October held under Chatham House rules, a senior economic member of the party said: “I think in that case obviously the circumstances have changed quite dramatically since [the release of the report], with the changes to the Financial Reporting Council, we’ve had a lot of turbulence within audit.

“There’s a huge debate going on in [financial services] about the scope of audit, and whether it is expected to do things that actually it is not obliged to do; that in some cases it is actually unfair to expect it to do.

“We have seen, coming from government, quite a confused approach around some of these matters. So really we are trying to signal those ideas in that report from Prem Sikka, and how can we then tailor them to whatever can potentially come out of that process of debate and reviews that are being undertaken by the government.

“We could end up with quite a different landscape if we come into office, and that could be quite soon if we have a General Election.”

Audit plans

The plans, commissioned in a report by shadow chancellor John McDonnell and written by a team led by Prem Sikka, professor of accounting and finance at the University of Sheffield, recommended a series of changes to the audit profession following high profile business failures.

This included a ban on audit firms selling non-audit services to clients; the creation of a state-backed audit body for financial services, and a new body to commission company accounting standards.

The report, commissioned following the Carillion and BHS collapses, also suggested the removal of all restriction on the ownership of auditing firms in order to drive competition and attract new entrants to the market; mandatory joint audits for large companies; and an independent body that would decide the remuneration of auditors. In the intervening period since the report’s release, public attention over the Interserve, Thomas Cook and Patisserie Valerie audits amongst others has focused attention on the audit regulator.

The Kingman report into the future of audit in the UK suggested the replacement of the Financial Reporting Council (FRC) with a new regulator, the Audit, Reporting and Governance Authority (ARGA), which is in progress and due next year.

The source added: “We don’t want to remake the wheel if there have already been some reforms. I get the appetite from talking to auditors that they would potentially be happy to have an extended scope of audit, provided that they can actually deliver on that and not be set up to fail.”