Legislation necessary for the government’s audit reform agenda may be delayed for up to another year and may not make the parliamentary agenda until after the next election, according to a news report.
The Financial Times writes that audit reform will be absent from the King’s Speech, due in November, adding another 12 months to the sector’s wait for substantial changes recommended following the collapse of construction giant Carillion in January 2018.
The move will throw into doubt key changes such as the creation of a new audit and financial reporting watchdog (ARGA—the Audit, Reporting and Governance Authority), its new powers, and the introduction of shared audits for large companies.
The Financial Reporting Council, set to become ARGA, is also working on projects that could be thrown into doubt. Recent moves to introduce new minimum standards for audit committees could become mandatory only if primary legislation is passed to create the new regulator.
The UK’s Corporate Governance Code is also under review, with some doubts among observers that changes could go ahead while the reform agenda remains uncertain.
Michael Lucas, a keen observer of audit regulation and co-founder of Brave, a governance consultancy, says: “Uncertainty is not the foundation of business success. Many businesses have already begun to invest in preparing for these reforms. (Some are almost ready.)
“The underlying reasons for the reforms have not gone away and, while this may give companies an extra 12-month implementation window to really drive the most value, the pressing need to strengthen corporate governance and audit arrangements remains.”
Five years so far…
The current phase of audit reform was kicked off by the Carillion collapse and culminated in publication of an audit white paper in March 2021.
Scores of recommendations were included in the white paper, with many hoping for substantial change. However, a slew of major proposals require primary legislation. The last Queen’s Speech in 2022 promised time for the reform measures.
However, though some work has emerged and the FRC has near doubled in size in preparation for becoming ARGA, legislation failed to come forward.
Uncertainty over new audit committee standards and the governance code could have a knock-on effect on expectations for new guidelines on internal controls and requirements for audit committees to consider so-called “challenger” audit firms—those outside the Big Four.
John Boulton, policy director at the ICAEW, a professional body for accountants, says it is “regrettable” and a “disappointment” that legislation which could be “essential plumbing” for UK audit, directors and financial reporting, has been delayed. He adds that the key issue is a delay in powers that would come with the creation of the new watchdog. He also argues the delay could have an impact on the adoption of non-financial disclosures by companies.
“This infrastructure would have been invaluable in strengthening sustainability reporting,” he says.
Elsewhere, among the firms outside the Big Four, there is also disappointment. David Herbinet, head of audit at Mazars, urged the government to “rethink” delaying reforms expected to strengthen corporate governance and create a more competitive audit market.
He says many FTSE 350 companies continue to experience a “very limited” choice of auditor when retendering.
“Delaying reform will have a major negative impact on the audit sector where the levels of concentration in the FTSE 350 are far too high, with the largest four firms still accounting for 98% of fees,” says Herbinet. “It is well recognised this poses a major threat to capital market stability were one of these firms to leave the market, for whatever reason.”
The King’s Speech is still some way off, giving time in which the government’s mind may be changed. Agendas are rewritten all the time. But in the current political climate, ministers may require some convincing that audit is a priority.