On 20 July the UK government announced new draft regulations on corporate reporting by very large companies. These would require them to provide more information on their significant risks, on how planned dividend payments could be met out of realized profits, on the actions taken by directors to prevent or detect major fraud, and on how the company assures the quality and reliability of its corporate reporting. On the face of it, nothing too controversial there. Or, is there?

In announcing the new measures, the government stated that the measures “respond to lessons learned from major and sudden corporate collapses in recent years, including that of Carillion”, and that they “form part of the government’s wider audit and corporate governance plans”. These plans had been developed over an extensive period off the back of a number of thorough and authoritative external reviews.

The Financial Reporting Council (FRC), for its part, said that the new requirements would “strengthen transparency and accountability in business by providing key information to investors and other stakeholders” and would “boost the quality of corporate reporting and enhance the UK’s reputation for high reporting standards”.

On 16 October, in a surprising move to many, the government withdrew the draft regulations “after consultation with companies raised concerns about imposing additional reporting requirements”.

‘Feet to the fire’

So, what has changed? The measures planned for implementation had been long-signalled, long-consulted upon, and broadly supported when announced. Crucially, they represented an opportunity for the government, when putting in place measures to mitigate the risk of future unexpected and disorderly corporate failures, to focus not just on the conduct and quality of audit (still a crucial element), but also upon the responsibilities of boards and management—a fundamental part of the corporate reporting ecosystem.

This also comes after the government decided to withdraw from a UK version of the Sarbanes-Oxley Act that would have brought legal responsibilities for directors regarding the effectiveness of their company’s internal controls. And instead, has chosen to introduce certain requirements via soft law as part of porposed revisions to the UK Corporate Governance Code.

With these proposals set to one side, we are left with a residual set of proposals, with auditors and the regulator at their heart, but precious little which holds the feet of those running companies to the fire. And the withdrawal of these proposals doesn’t exactly encourage confidence in the prospects of any other reform proposals ever making it to the finishing line.

Setting aside the monumental waste of time and effort this will represent for everyone involved in developing reform proposals with a broad base of support over the last five (yes, five) years, it is worth also challenging the implicit view from the government’s consultation that the proposals were, on reflection, found to be unreasonable or disproportionate.

A controversial view, perhaps, but we would argue that the requirements should have been relatively straightforward to meet by a well-run company, with a firm grip on managing its risks, on guarding against fraud, on making sure that dividend payments are appropriate and supportable, and on managing assurance arrangements.

‘Backward step’

None of this was rocket science, and the process of gathering this information together to report on every year should likewise not have proven onerous. Indeed, we know that many companies have already been adopting the requirements in advance of their formal introduction.

It’s worth dwelling, too, on why reliable and trusted company information is so important. It is not just to support the effective functioning of capital markets, with investors at their heart. It is also about providing transparency and insight for the range of other important stakeholders (employees, pensioners, suppliers, customers) that seemed very important when Carillion collapsed (over five years ago) but not so much now it seems.

This is not either a drive to add on more and more published information from companies to the point that it becomes impossible to digest and disproportionately costly to produce. We believe that the government’s proposals were proportionate and, in some cases (e.g., the requirement to produce a resilience statement) an improvement upon existing reporting requirements.

It’s absolutely right that there should be an ongoing focus on reporting and regulatory burdens (it’s always much easier to add than subtract), but this feels like the wrong place to do so.

So, ACCA’s view is that the government decision represents a backward step which, making a slight adjustment to the FRC’s previous words, will reduce the quality of corporate reporting and diminish the UK’s reputation for high reporting standards. We will continue to argue for and support improvements to corporate reporting (and to audit quality and to audit oversight) in the UK, to ensure that the UK continues to be a world leader in this really important area.

Mike Suffield is director, policy and insights at ACCA.