Hang the bunting, hold the front page, stop the clocks: audit reform is back on the UK government’s agenda.
Yes, after just over a week in power, the new Labour government delivered a King’s Speech, which, among many other measures, will breathe life back into an audit reform agenda. It started with the collapse of Carillion in 2018 and, after much debate in the City, among accountants and in accountancy bodies, was quietly dropped.
Despite initial enthusiasm, the Conservative government cancelled planned reporting requirements
In fact, that’s not entirely true. Despite initial enthusiasm for scores of proposals from three monumental reports, last October actually saw the then Conservative government cancel planned new reporting requirements on risk and resilience, audit and assurance and anti-fraud measures. Sad faces all round for those who had thrown their weight behind them as thoroughly modern, and laudable, new measures.
Brand-new powers
From the King’s Speech, there is no way of knowing whether those disclosures will be resurrected. But what we do know about the coming draft Audit Reform and Corporate Governance Bill is that it includes a new regulator – the Audit, Reporting and Governance Authority (Arga) – to replace the existing Financial Reporting Council, with brand-new powers over auditors and, potentially, company directors, particularly those on audit committees.
In the King’s Speech briefing notes, the government does not hold back: ‘Tackling problems with audit and reporting will help minimise the impacts of corporate failures. When companies fail, it affects jobs and lives across the UK, like the 11,000 jobs lost when BHS collapses or Carillion’s 30,000 unpaid subcontractors, £1bn of debt and at least a £500m pension deficit.’
Much of the ire in the City has been caused by what it views as a vast wave of new reporting demands
But before we get carried away, allow me to offer a note of caution. We have not seen the details of the bill yet so it is difficult to know quite how far it will go in empowering watchdogs.
One proposal that the previous government intended to introduce was the ability for Arga to sanction directors for reporting failures. And yet much of the ire in the City over governance in the past couple of years has been caused by what it views as a vast wave of new reporting demands that extend from the traditional finance information to non-financial issues. Big companies are coming to terms with the recommendations of the Task Force on Climate-Related Financial Disclosures and may soon have to deal with two new standards from the International Sustainability Standards Board.
Mission for growth
When risk and resilience reporting was killed off last year, London Stock Exchange chief executive Julia Hoggett was quoted in the government’s press release and has become well known for her argument that governance (read reporting) is a drag on growth.
Whatever measures are on the way must first pass through the filter of the government’s growth agenda
And if Labour is about anything, it is about economic growth. When the Financial Conduct Authority announced a softening of the listing rules for dual-class shares last month – rules that were much criticised by asset managers concerned with shareholder rights – new Chancellor Rachel Reeves threw her weight behind them. In a press statement backing the changes, she reminded us that financial services were at the ‘heart of this government’s growth mission’.
Having said that, the return of audit reform is good news and a victory for those who see regulation, particularly financial rules, as a living thing that must adapt to changing times.
We should bear in mind, though, we don’t know the detail, and whatever measures are on the way must first pass through the filter of the government’s growth agenda. And that may produce unexpected results.
More information
See previous AB coverage of related issues: ‘Audit reform’s unfulfilled promises‘, ‘Regulators must be feared’ and ‘Corporate governance reform rolls back’
