A group of investment experts claims the government’s decision to ditch some of the most significant components of UK audit reform makes “little sense” and is based on “mistaken” beliefs about regulation.
The views appear in a letter in the Financial Times, in which the investors—including Sandy Peters, head of advocacy at the CFA Institute, and Natasha Landell-Mills, head of stewardship at fund manager Saracen & Partners—say the U-turn performed by the business minister last week, on new rules set before Parliament in July, effectively “neutered” reforms prompted by the collapse of Carillion in 2018.
The letter says: “It is difficult to overstate the disappointment of investors, and other users of corporate information, at the news that the UK government is minded to shelve reforms that are critical to its ‘restoring trust in audit and corporate governance’ agenda—prompted by the Carillion failure and other accounting scandals.”
The letter, also signed by Charles Henderson, chair of the UK Shareholders’ Association; Jane Fuller, a fellow of the CFA Society in the UK; and Mark Northway, director of ShareSoc, adds that government seems “intent” on deregulation “in the mistaken belief that this will make the UK stock market more attractive”.
They continue: “While we can all agree that it is vital to avoid unnecessary red tape that dampens economic growth, shelving the entire package of reforms is a missed opportunity to improve transparency and reassure investors about a company’s long-term stability.”
They also argue that, without the reforms, investors “simply have to increase the equity risk premium on shares traded on the UK stock markets—a cost greater than that of implementing such reforms.”
Auditors and investors were shocked last week when business minister Kevin Hollinrake released a statement, abandoning reforms that would have seen board directors issue a new report on their audit and assurance policy, a statement on resilience and risk, a report on measures to beat fraud and a distributable profits figure.
All the measures had been recommended in reviews undertaken as part of a widespread post mortem on what went wrong at Carillion when the construction giant collapsed. The company famously went bust with debts of £1.3bn.
Just a week before the government’s decision to reverse course, KPMG, the audit firm, was fined £20m (a discounted figure) by the Financial Reporting Council (FRC) for failures on the Carillion audit in 2018 and 2013.
The FRC itself has been preparing to be reshaped into the Audit, Reporting and Governance Authority (ARGA), gaining new powers, but the legislation needed appears to have been delayed until after the next general election, prompting more disappointment with a process that is now five years in the making.
The FRC has pushed ahead with a review of the UK Corporate Governance Code, which is expected to include some measures that arose as part of the Carillion review, including a new reporting regime for internal controls. However, organisations will be subject to the code’s “comply or explain” principle. Many industry players argued it should be made mandatory in law.
When the government issued its announcements last week, it included comments from Julia Hoggett, chief executive of the London Stock Exchange. She said that the “UK’s approach of ever-increasing corporate governance process” has “impacted the effectiveness of listed companies and the standing of the UK over other capital markets”.
This week’s investor letter makes clear there is widespread concern with the government’s approach to audit reform. Electorally, pulling the plug may be expedient: governance is rarely a vote winner. But the row over audit reform is not likely to go away.