January 2025 roundup

It has once again been a busy few months for our policy, public affairs and advocacy work as we continue to champion the vital role of internal audit with policymakers, regulators, and other decision-makers. 
 
Following the letters we wrote in November to the Secretary of State for Business and Trade and the Chair of the Business and Trade Select Committee highlighting our concerns that the collapsed construction giant ISG did not appear to have a proper internal audit function, we have continued our advocacy work in this area. This includes successfully engaging Rt Hon Liam Byrne MP, the Chair of the Business and Trade Select Committee, who has agreed to look further into the issues we raised as part of the Committee’s scrutiny of the forthcoming draft Audit Reform and Corporate Governance Bill. We have also met with senior civil servants at the Department for Business and Trade to discuss the issues we raised in our letter to the Secretary of State. In December, we published our latest Parliamentary Briefing, "Building with Confidence: The Case for Mandating Internal Audit for Major Construction Companies," which was sent to all MPs and highlights the research we carried out examining the internal audit capabilities of the top thirty construction companies and advocates that internal audit should be a mandatory requirement for construction firms involved in building major public infrastructure projects such as schools and hospitals. 
 
Another key focus area has been our response to the Financial Reporting Council’s proposed revised UK Stewardship Code. In case you are not aware, the Code is a voluntary reporting framework designed to promote high stewardship standards by asset owners, asset managers, and service providers. The Code is important because it helps set high governance standards for those responsible for looking after our savings, investments, and pensions. 
 
The revised Code aims to streamline reporting requirements and reduce the burden on signatory firms. However, we are concerned that the revised Code waters down the current version’s important focus on the benefits of good stewardship to the economy, the environment, and society. Especially given that investors face increased material risk exposures related to environmental, social and governance issues, including an increase in greenwashing scandals. The revised Code also removes the requirement for signatory firms to report on what internal and external assurance they have received on their stewardship policies and processes, including from their internal audit functions. Therefore, we have had meetings with other stakeholders to listen to different points of view and explore if they share our concerns, including the TUC, International Corporate Governance Network, and Share Action. In January, we also held a virtual roundtable discussion with ten senior internal audit executives from Code signatory firms to listen to the views of our members and use their insights to help shape our response. It is clear from the roundtable that members do share our concerns about the revised Code. We will submit our final consultation response in time for the deadline, which is later in February. 
 
In December, we wrote to the Chief Executive of the Pensions Regulator to explore opportunities to strengthen their Code of Practice regarding internal audit. The latest version of the Code published in March 2024 already has a dedicated section on internal controls, internal audit, and independent assurance. However, we are concerned that the Code does not explicitly require that all companies operating their own trust-based occupational pension schemes or companies that operate master trust schemes should establish and maintain an independent internal audit function to ensure an effective governance system of internal controls. This, of course, differs from financial services companies providing contract-based pensions and personal pensions, as these companies are required to have an internal audit function by the PRA and FCA, meaning there is currently a regulatory gap. We will continue to engage the Pensions Regulator on this issue.  
 
In January, we submitted a response to the Ministry of Housing, Communities, and Local Government’s consultation on local audit reform. We highlighted the vital role that a stronger internal audit profession can play in enhancing governance across local government and reflected on some of the challenges currently facing the profession, particularly in terms of skills and resources. Additionally, while we always advocate that internal auditors should have an open, constructive and cooperative relationship with external auditors, we provided clarity on the relationship between internal and external audit in accordance with both professions’ standards. We also strongly supported a proposal mandating that internal audit reports must be considered by the governing body of the Council, including, where appropriate, the full council or board of a smaller body. We believe this is crucial to strengthen the local audit regime, ensure risks are properly managed, and provide adequate assurance for local taxpayers. 
 
We are also pleased to report that Ofwat has now published its Price Review 2024 final determinations. The Chartered IIA was encouraged by Ofwat to respond to the consultation associated with the review and we are pleased to see that we have been quoted in the final determination documents, which overall place a greater emphasis on the need for company directors of water companies to seek board assurance in relation to their business plans and risks.  
 
Over the last few months, Gavin Hayes, our Head of Policy and Public Affairs, gave a keynote address to the Westminster Business Forum Conference “Next Steps for Corporate Governance and Audit Reform in the UK” on the topic of embedding internal audit into corporate governance regimes. He also presented at BDO’s Heads of Internal Audit Breakfast Forum on the revised UK Corporate Governance Code and what it means for internal audit, particularly concerning Provision 29 and the new requirement for a Board Internal Controls Declaration. We were also quoted in a news piece on Board Agenda reporting on the FRC’s latest research on reporting against the UK Corporate Governance Code, which revealed that only one in ten companies currently had good reporting on internal controls. Gavin also attended an FRC Stakeholder Insights Group meeting in December, which discussed many of these issues. 
 
Finally, we are pleased to report a remarkable 292% year-on-year increase in the quality and quantity of our media coverage for the Chartered IIA and the wider internal audit profession over the past year. This achievement includes securing coverage in prestigious media outlets such as the Sunday Times, the Financial Times, and even The Sun! 
 
Key focal points for the months ahead include responding to the forthcoming review of the Independent Commission on the Water Sector Regulatory System, which builds on our ongoing engagement with DEFRA and Ofwat advocating for internal audit to be a mandatory requirement across the water sector. We are expecting the Department for Business and Trade to publish and consult on proposals for a streamlined non-financial reporting framework, which could have impacts for internal audit. Last but not least, we also plan ongoing advocacy work around supporting the successful embedding of our new Internal Audit Code of Practice, including engaging the NED community and regulators and raising awareness amongst stakeholders.