After eight years, two parliamentary reviews, three major independent reviews and a white paper, audit reform – a topic that has dominated discussion in UK corporate governance circles since 2018 – has been called to a halt.
Despite listing a reform act in the 2024 King’s Speech – the UK’s legislative agenda – the government announced at the end of January that it would no longer pursue its reform objectives, which would have seen the creation of a brand-new watchdog with strengthened powers over company directors.
Lost opportunity
The end prompted widespread disappointment. Jonathan Geldart, director general of the UK Institute of Directors, says that audit reforms will now likely ‘stultify’, a development that has implications for all UK companies across the spectrum.
‘There’s been a lost opportunity,’ Geldart says, ‘by using a blunt instrument of cutting everything rather than refining what was required.’
Claire Lindridge, director of policy and insights at ACCA, agrees that UK governance has suffered a loss that would have supported the economy. She adds that ‘enhancing corporate governance is an opportunity to help businesses run better’.
The end for audit reform came on 20 January when a letter emerged from business minister Blair McDougall to MPs on the House of Commons business and trade committee revealing an end to work on an ongoing consultation. He said parliamentary time was in short supply, audit quality and audit regulation had already improved and the government had other interests on its agenda. In bold lettering, McDougall wrote that the ‘priority is to promote growth and reduce administrative burdens’.
It is worth bearing in mind, though, that the promised reform involved only a fraction of the proposals included in the initial reviews that followed the collapse of construction giant Carillion in 2018.
What might have been
The bill would have created a new regulator, the Audit, Reporting and Governance Authority (ARGA), to replace the Financial Reporting Council (FRC); extended the definition of public interest entities (PIEs) to include large private companies; handed the regulator new powers to ‘investigate and sanction company directors for serious failure’; and built a new regime for overseeing the audit market.
Other policies had already been jettisoned. A requirement for companies to publish an audit and assurance policy and issue a resilience statement (a move lauded by many experts) was axed by the previous government.
‘Until there is another burning platform, nothing much is going to change’
A director’s statement on internal controls was moved to the UK’s Corporate Governance Code, rather than being legislated for. Any idea of ‘managed shared audit’ – a small auditor working alongside a Big Four firm – has long since faded from discussion.
What next?
So, what’s left, if anything, of audit reform? McDougall says the government will push ahead with efforts to put the FRC on a statutory footing (not soon enough for current chair Jan du Plessis, who announced shortly after the government row-back that he will step down in September). It will also continue with plans to simplify and modernise corporate reporting.
Could primary legislation for the FRC be an opportunity to continue with elements of the reform agenda? Lindridge thinks it unlikely. ‘I don’t hold out much hope for that,’ she says. Efforts to include legislation giving the regulator new powers over company directors or extend the PIE definition would run against the stated ‘growth’ agenda, she adds.
‘It is important to call out bad practice and for the FRC to have the power to deal with enforcement’
‘Anything is better than nothing,’ Lindridge continues, noting that getting the FRC on a statutory footing ‘has to be a step forward. But unless – and, frankly, until – there is another burning platform, nothing much is going to change, I think.’
New powers over directors is an important issue for Geldart. ‘The lawyers of boards won’t be very happy, but actually it is important to call out bad practice and for the FRC to have the power to deal with enforcement, and auditors. Quite frankly, I just think it’s a lost opportunity.’
The issue at stake is one campaigners have pushed throughout the reform debate: company directors should face as much accountability for corporate reporting as auditors.
‘It’s hard to see how powers over directors – encouraging directors to generally behave well and run their companies in a sensible manner – can be harmful to growth at the margins where directors may not be acting with integrity,’ says Lindridge.
Geldart would like to see more ‘directed disqualifications’ to help counter public perception that business is ‘bad’. ‘Actually it’s not bad, it just needs to be held to account appropriately,’ he adds.
Efforts to streamline corporate reporting will also continue. Currently the plan is to remove the requirement for a strategic report for ‘many’ medium-sized companies and wholly owned subsidiaries. There are also proposals to end production of a directors’ report by any company.
The project holds out the hope that some elements of the 2021 white paper might be resurrected
The reporting project holds out the hope that some elements of the 2021 white paper – such as reporting on distributable reserves and the legality of proposed dividends – might be resurrected.
Adam Leaver, professor in accounting at Sheffield University and co-founder of the Audit Reform Lab, is not holding out much hope. ‘Because you’ve lost this programme of reform, and you’re talking about doing little bits and pieces here and there, it makes me worry that it’s just going to be lobbied away to nothing.’
There are others moves under way in the UK. Sustainability reporting standards are in the wings awaiting approval, and a new voluntary regime for those offering sustainability assurance is also in the planning stages. But the main thrust of audit reform, after years of deliberation, has gone. That doesn’t mean the concerns those policies were meant to address have been put aside. Indeed, many will remain, alongside the larger question of why audit reform is often proposed but seldom makes it to implementation stage.
Perhaps the biggest test for government, however, is not whether cancelling reforms helps with economic growth. It’ll be the next corporate scandal and whether its roots can be connected to cancelled reforms. Such a ‘burning platform’ will say much about the current decision.
More information
See ACCA’s initial response in the AB article ‘Audit reform u-turn makes no sense’
