The government has U-turned on key planks to UK audit reform, announcing it would discard proposed new reporting regulations that introduce resilience reporting to companies, as well as the production of an audit and assurance policy every three years.
Though some City figures have celebrated the end of the policies that, they claim, introduced new reporting “burdens”, others have expressed disappointment and even fears that it may be the end of the audit reform process triggered by the collapse of Carillion in 2018.
The audit and assurance policy was to be introduced by regulation—secondary legislation—but its abandonment raises questions about the UK Corporate Governance Code, which mentions the policy as a code requirement.
Iain Wright, managing director of reputation and influence at the ICAEW, an accountancy body, says the reversal is a “major blow” to campaigners for “improved transparency and trust in UK corporate reporting”. He says the about-turn is a “surprise” and that the government has “abandoned” measures “needed to boost corporate transparency”.
“The measures set out in the draft regulations, while not perfect, were the product of extensive due process and consultation,” he added. “Their withdrawal appears to signal an end to the UK process of audit and corporate governance reform initiated after the demise of Carillion, and it is to be regretted.”
‘This is a mistake’
Elsewhere, there are concerns that the aims of audit reform have been jettisoned. Anne Kiem, chief executive of the Institute of Internal Auditors, says the rejected polices were “vital” for helping prevent corporate scandals linked to audit failures such as those involving BHS, Carillion, Patisserie Valerie, Thomas Cook and, most recently, Wilko.
“These new reporting requirements have a key role to play in enhancing the audit and assurance processes of our largest companies, as well as enhancing the UK’s global reputation for good corporate governance and attracting investment. We believe this is a mistake and makes the need for the Audit Reform Bill all the more important,” says Kiem.
Mike Suffield, director of policy and insight at ACCA, says the concern is now where the full force of audit reforms falls. “What is left of the government’s reforms will be narrowly focused on auditors and oversight rather than the responsibilities of directors—which we consider critical for the ecosystem to operate effectively.”
Suffield adds that despite the decision, many companies have already “voluntarily” adopted the measures.
The government frames the change in direction as part of an effort to reduce red tape, an issue raised and pursued by the current government since the UK’s exit from the European Union.
Business minister Kevin Hollinrake says that, even though the regulations were set before Parliament in July, consultation with “business and stakeholders” has persuaded government there is an “appetite” for the simplification of existing reporting requirements.
“This will deliver a more targeted, simpler and effective framework for both business and investors, reinforcing that the UK is one of the best places in the world for firms to list and to do business,” he says.
Falling listings
The number of listings in the UK has become a concern and has been falling for some years. According to Statista, at the beginning of 2015, there were 2,429 companies listed on the London Stock Exchange (LSE), compared with 1,915 in May this year.
A statement from Julia Hoggett, chief executive of the LSE, is included in the government press release. Hoggett welcomes the policy.
“Releasing listed companies from the additional reporting burdens that were proposed is another step toward the level playing field UK companies need to compete and drive the growth economy to the benefit of all stakeholders.
“If companies are to have the certainty they need, it is vital that this reform and steps to enhance the competitiveness of the UK are backed by political consensus.”
The drive for UK audit reform began in earnest after the scandal of Carillion’s insolvency.
Parliamentary investigations followed. The government then ordered three separate reviews: the Competition and Markets Authority looked at the audit market; Sir John Kingman looked at audit regulation; and Sir Donald Brydon reviewed audit quality and effectiveness.
The biggest recommendation to come out of the process was the replacement of the Financial Reporting Council with a new regulatory body: the Audit, Reporting and Governance Authority. Though this move has been touted since publication of the Kingman Review in 2018, the government is still to pass the necessary legislation to bring the new watchdog into existence.
This week The Times reported that Carillion’s former chair Philip Green and five other former board members escaped a legal battle after the Insolvency Service dropped efforts to have them disqualified as directors. The Times says the court action would have been a “test case” on the responsibilities of non-executive directors.
Some elements of the audit reform process have survived. Audit committees are faced with new minimum standards, the government could still order managed shared audits and the new regulator is still to come into being. However, without the measures set aside this week, the project is looking very different than originally envisaged.