Just over eight years ago, Carillion’s collapse dominated the headlines. Thousands of workers, suppliers and small businesses were left exposed as the construction giant imploded. This exposed poor governance at the firm and the fragility of the UK’s audit and corporate governance system. The expectation then was clear, something like this must never happen again.

That is why the government’s decision to abandon the long‑promised audit reform and corporate governance bill, which has enjoyed rare cross-party support, is both disappointing and extremely concerning. For years, we were told that reform was coming.

After spending tens of millions of pounds of public money on repeated independent reviews, inquiries, consultations and even a white paper, the bill showed real signs of progress when the Labour government included it in its first King’s Speech in 2024.

There was cautious optimism that ministers would finally find the political will and the courage to overhaul the audit and governance framework and give the Financial Reporting Council the tools it needs to act as a stronger, more effective regulator.

But last week, the plug was pulled. In a letter to Rt Hon Liam Byrne MP, chair of the business and trade committee, Blair McDougall MP confirmed the government was scrapping the audit reform and corporate governance bill to “avoid significant new costs to firms” and because parliamentary time was “limited”. Growth, we are told, must come first.

Supporting growth is essential, and maintaining a proportionate regulatory framework is sensible. But neither is a substitute for the systemic reforms that are long overdue and widely recognised as necessary to protect jobs, promote investment and deliver economic stability. Treating short‑term implementation issues as a reason to avoid reform is a false economy that could lead to far more serious costs for businesses and the wider economy further down the line.

The high cost of failure

The fact is, corporate collapses linked to audit and governance weaknesses have already cost the UK economy dearly in lost jobs and growth. Carillion alone resulted in over 3,000 job losses, 30,000 affected subcontractors (many of whom were SMEs), £148 million in public money lost, and the cancellation of 450 construction projects, in some cases causing delays to schools and hospitals.

The government argues the need for major reform “is less pressing than it was” and that “a great deal of progress has been made since the collapse of Carillion in 2018”. But the reality tells a different story, and we must not forget why reform was needed in the first place.

Recent history should make us cautious about assuming Carillion was the last of its kind. Patisserie Valerie, Bulb, Wilko, ISG and Thomas Cook all collapsed in the years that followed, exposing persistent weaknesses in internal controls, risk management and oversight. A common thread among many of these companies was their lack of an internal audit function, leaving serious gaps in assurance and oversight of risk—a deep flaw in their early‑warning capability.

These failures did not occur because of too much regulation: they occurred because of unchecked and irresponsible risk-taking and bad governance, including the absence of fundamental assurance functions such as internal audit. Internal audit plays a vital role in helping to avoid exactly these kinds of breakdowns. It gives boards an independent view of whether internal controls are working, whether risks are being managed and mitigated, and whether reporting is reliable.

Proposals within the audit reform and corporate governance bill recognised the importance of stronger accountability when governance fails. This included extending the Financial Reporting Council’s enforcement powers so that, in exceptional circumstances, all company directors could be sanctioned and held accountable for corporate reporting failures, not only chartered accountants. This would have closed a significant loophole and ensured that all directors could face consequences for false or inaccurate reporting.

Power to the FRC

This is why the government’s remaining commitment to place the Financial Reporting Council on a statutory footing “as soon as parliamentary time allows” is so critical. A regulator cannot be effective without the powers and authority to oversee the market it is responsible for. This needs to happen sooner rather than later and must be a priority for ministers; this can’t be another much‑needed change that falls by the wayside.

The government has also announced its intention to modernise corporate reporting. This is something that is welcomed and the Companies Act 2006 is long overdue an update. Common sense and proportionate measures that improve the quality and efficiency of reporting are beneficial for business and investors.

But modernising the corporate reporting framework must not become a race to the bottom—eroding reporting standards, lowering the corporate governance bar, weakening accountability, or diluting the seriousness with which businesses approach their ESG responsibilities. The efficiency gains of streamlined reporting will prove short-lived if they come at the expense of continued corporate scandals linked to false or inadequate reporting, which in turn spook investors.

The UK faces an urgent need for economic growth, but growth that rests on weak foundations or relies on unchecked deregulation to deliver short‑term gains is unlikely to be sustainable over the longer term. Indeed, such an approach can pose a systemic risk to the entire economy, as we saw during the global financial crisis. A modern economy requires modern governance. Companies rely on high‑quality audit, accurate corporate reporting and strong governance to maintain investor confidence, take risks responsibly and operate effectively in more volatile geopolitical and economic conditions.

The government’s decision to scrap the audit reform bill has changed the route, but it must not change the destination. If the UK wants to remain a premier investment destination in the world, it must ensure its governance foundations are fit for purpose.

We urge the government to deliver on its promise to put the Financial Reporting Council on a statutory footing, with the powers it needs to do its job effectively—and to make this a priority.

Arleen McGichen is president of the Chartered Institute of Internal Auditors