The collapse of the construction firm ISG means audit reform and a new audit regulator are ever more pressing, according to a leading UK parliamentarian.

Liam Byrne, chair of the House of Commons business and trade committee, told The Sunday Times that the company’s collapse was “fresh evidence for why urgent reform of the British audit industry is now so essential…Our committee will want to make sure the new Audit Reform and Corporate Governance Bill is fit for purpose, and that means learning the lessons from the shambles of ISG’s demise.”

ISG went into administration in September, with work on existing contracts coming to a halt. A “statement of affairs” was filed with Companies House by administrators.

There is no evidence that audit contributed to ISG’s collapse.

Byrne’s comments follow a letter sent to his office by the Chartered Institute of Internal Auditors (CIIA), raising concerns about internal audit and financial controls at ISG and urging the business and trade committee to investigate.

CIIA says its own research shows several recently collapsed companies failed to have appropriate internal audit arrangements in place.

The letter, written by CIIA’s chief executive, Anne Kiem, also argues ISG’s collapse “underscores the urgent need” for audit reform legislation.

Kiem writes: “Strengthening internal audit and governance requirements will be key to helping prevent similar collapses in the future, in turn safeguarding jobs and growth, as well as promoting our businesses as safe to invest in.”

The new audit reform bill was announced in the King’s Speech in July, but offered little detail about what could be expected in the legislation or the timeframe for introduction.

The previous Tory government began a review of audit reform following the collapse of another construction giant, Carillion, in 2018.

Measures proposed include a new audit and governance regulator, ARGA, but the Tories made no headway with reform.

The bill is expected to give the new watchdog legal standing and new powers.

In a House of Lords debate in October, Lord Sonny Leong said a new bill would “look to give ARGA powers to investigate and sanction company directors for serious failures in meeting their existing duties and responsibilities relating to accounts, corporate reporting and audit”.

Minimum standards

Lord Leong also indicated that audit committee minimum standards would become “enforceable” as part of the bill.

The government is also considering “managed shared audit”, a process in which two audit firms—a large firm and a smaller so-called “challenger” firm—work on the same audit,

Lord Ian Livingston, a former CFO at two FTSE 100 companies, said Big Four firm audits have been improving, while audits by firms outside the Big Four are “going backwards”.

“There is a real concern among many companies that shared audits will lead to higher costs and lower quality,” he said.

Lord Prem Sikka, who brought the debate, said more openness is required around the audit process.

“For far too long, audits and audit firms have escaped transparency. That silences stakeholders and leads to poor audits and accountability.”