Proposed audit reforms will increase operating costs for companies, according to new research.
A survey of 250 finance chiefs, audit specialists and risk managers at UK-listed companies reveals 43% believe the internal controls reforms alone, laid out in a white paper published in March, will see costs balloon.
According to Galvanize, producers of governance and risk software, the internal controls reforms could cost between £10m and £20m per company and demand a full year’s work from around 20 full-time staff.
The government proposals, which are set out in a 230-page report, range across all areas of audit and the audit market. Reforms for internal controls are loosely modelled on the Sarbanes-Oxley Act in the US, which was introduced following scandals at Enron and WorldCom.
At the time of the white paper’s launch, business secretary Kwasi Kwarteng said: “It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.”
Internal controls
Among a slew of reforms in the white paper, Restoring Trust in Audit and Corporate Governance, the government offers a preferred option of seeing the introduction of a new directors’ responsibility statement in which boards assess the “effectiveness” of their internal controls and financial reporting, and a description of how directors have provided assurance that their statement is “appropriate”.
The measures avoid detailing the specific internal controls measures that should be used, or mandating auditors provide external assurance, a move which sets the UK approach apart from the US.
In all, the white paper is a sprawling piece of work. As well as internal controls, measures include the introduction of a new audit watchdog, the Audit, Reporting and Governance Authority (ARGA), operational separation of audit from other services and the introduction of shared audits. Other steps include the introduction of new standards for audit committees and sanction for committee members who fail in their duties.
Lack of leadership attention
The Galvanize survey provides some optimism. Broadly, 69% say reforms will have a “positive effect” while 54% say they will “encourage or enable” entrepreneurship. A weighty 45% say the reforms will encourage more IPOs.
But there remain concerns about timing. While many want to push ahead immediately with change the survey found “reticence” among those questioned.
“Most survey respondents did not share this enthusiasm,” the report says. “Why?” It adds: “Despite readiness and confidence expressed in other areas of the survey, significant challenges remain.” Investment in new technology is one area of concern for 85% of respondents, while almost a third, 32%, say their C-suite and senior management teams are “disengaged” from the topic.
Leadership attention will likely be a major issue in many companies where the focus will currently be on adapting to business during the pandemic. Indeed, “competing priorities” was a problem raised by 44% of respondents. While 38% highlight “company culture” as an impediment, with the same number pointing to “poor communication” as an issue.
Consultation on the white paper will be under way until July. There is much detail to be settled. Timing may well be up for grabs.