Audit reform’s unfulfilled promises

It was Kwasi Kwarteng as business secretary who published a white paper in 2021 setting out the government’s approach to audit reform in the UK. But just as his work as chancellor never really got off the ground – he famously lasted little more than a month in office – so his reforms remain largely unfulfilled too.

The number of implemented measures from the white paper is surprisingly small. But after a series of u-turns and cancellations, one did recently sneak through to much applause: a newly revised UK corporate governance code (issued in January 2024) asked boards to report on their monitoring of internal controls, describe their effectiveness and failings, and the work done to correct deficiencies.

That means, if they aren’t already, audit committee chairs and internal audit chiefs will become new best friends, with boards relying heavily on the wisdom and insight of internal audit when it comes to writing those new reports. They are set to come under intense scrutiny.

Quite right too. Internal controls are a key part of any large operation and should be a key defence against the kind of corporate collapse that took down construction giant Carillion in 2018, triggering the UK’s latest quest for audit reform.

Shifting sands

The problem for the audit reform agenda is that it’s been underway so long that the politics have changed. While Kwarteng may have seemed enthusiastic back in 2021, governance is viewed very differently now.

A quick history of the past few months offers the evidence. In October, to widespread disappointment, the government killed off new measures that would have had boards reporting on their audit and assurance policies, resilience and risk preparations, anti-fraud measures and distributable profits. All were considered substantive additions to the UK’s reporting landscape by experts.

The u-turn seems to have come about largely as a result of lobbying by the London Stock Exchange and a body chaired by its chief executive, Julia Hoggett, known as the Capital Markets Industry Taskforce (CMIT).

In November 2023 further new reporting requirements were dropped from the revised governance code – among them the need for audit committees to report on how ESG information is assured (although it has to be said, the Financial Reporting Council shed many of the measures on the grounds that they duplicated developments elsewhere).

In the same month, however, the King’s Speech, the UK government’s legislative agenda, failed to mention an audit reform bill that would have created a long awaited new watchdog, the Audit, Reporting and Governance Authority, with intimidating new powers.

Reset

The whole adds up to a major adjustment. Worried about the UK’s competitive position, the government has gone cold on adding to governance requirements, mostly new reporting measures – a move that chimes with the CMIT’s open letter calling for a governance ‘reset’.

Where does that leave the UK? The promise of audit reform and the many measures thought necessary following the Carillion scandal remain aspirations gathering dust. The risk and resilience report, viewed as an innovative piece of thinking, is now filed in the ‘would’ve, could’ve, probably should’ve’ cabinet along with many other good ideas.

Cancellation or delay may boost the competitiveness of the UK in the short term, but failure to move forward on reform may eventually be viewed by investors as a failure to keep pace with the needs of a changing world and its inherent risks. Confidence in UK regulation may therefore dwindle.

Whatever investors’ views are, the government’s change of heart demonstrates the City gaining influence ahead of the accounting and audit sector and, indeed, the experts commissioned to advise government on reform.

We are also reminded that reporting and governance are as sensitive to changing political sentiment as any other policy area.