Delaying audit reform will not promote growth
Disappointment, frustration and warnings of missed opportunities and a blow to trust were prominent in reactions to the government’s decision to “scrap” the Audit Reform Bill. Accountancy bodies, investors and pension funds lined up with the Chartered IIA to protest and highlight why the long-awaited reforms are vital to our economy.
Audit experts and investors disagreed strongly with Blair McDougall, Minister for Small Businesses and Economic Transformation, who explained in a letter to Liam Byrne, Chair of the Business and Trade Committee, that the move would boost growth. They argued that audit reform and a more powerful regulator are essential to support the growth the government seeks.
After stressing the need to focus on growth and reduce “administrative burdens”, McDougall wrote that reform is now “less pressing” because of “progress” made since the collapse of public-sector contractor Carillion in 2018. He also said that Parliament lacked time to process the legislation.
Yet those involved most closely with the audit profession and corporate governance pushed back. The Chartered IIA has been prominent in seeking to accelerate action to increase the impact of the regulator and highlight the vital role of internal audit to scrutinise corporate behaviour and identify organisational risks. More scrutiny and regulatory powers, not less, is essential for accountability and strong governance, it argues.
Anne Kiem OBE, CEO of the Chartered IIA, sent a letter to the Secretary of State for Business and Trade, also signed by 12 leading business and governance bodies and academics, expressing their disappointment.
The signatories, who include the Director General of the Institute of Directors, the CEO of ShareAction and the Chairman of the UK Shareholders Association, highlight the corporate failures that have occurred since Carillion. "We urge you to publish the proposals for a modernised corporate reporting framework without delay, and make it a clear priority to deliver the strengthened audit regulator,” they said.
“More pressing than ever”
Last September, the Chartered IIA co-ordinated a letter from 66 cross-party MPs calling for the Audit Reform Bill to be prioritised and for the Financial Reporting Council (FRC) to be replaced with a more powerful Audit Reporting and Governance Authority (ARGA). They wrote the “case for reform is more pressing than ever”.
Anne Kiem called the decision to scrap the Audit Reform Bill “deeply disappointing”. She urged the government to put “the FRC on a legal footing with the powers to do its job effectively and to make this a priority.”
Gavin Hayes, Head of Policy and Public Affairs at the Chartered IIA, reiterated this disappointment in a post on LinkedIn. He pointed out that “eight years after the collapse of Carillion, it is frankly remarkable that not a single piece of audit reform legislation has been delivered.”
This is despite four major reviews that called for reform and “further corporate failures linked to weaknesses in audit and governance.”
Audit reform is not about burdening businesses, he added. It is “projobs, progrowth and proinvestment”. It is about “supporting businesses to take risks responsibly and ensuring greater accountability when things go wrong.”
Critical infrastructure needs internal audit
The Chartered IIA continues to campaign for a regulatory requirement for critical and national infrastructure organisations to have internal audit functions. Nearly half of the UK’s major broadband suppliers currently lack internal audit capabilities while two water companies and several energy companies do not have an internal audit function.
In the past month, newspapers have been full of stories of customers across Sussex and Kent using standpipes and bottled water for several days on repeated occasions. Ongoing stories highlight the pollution of British rivers because of inadequate investment in infrastructure. These reports call into question the argument that external audits and the FRC with its current remit are sufficient to protect stakeholders.
The FT reported on South East Water’s “creaking infrastructure and finances” on 22 January, saying it had paid “almost as much in interest and dividends as it invested in the network” over the past 15 years. Meanwhile, Thames Water’s finances have been in the news for months, with reports that a single fault at its ageing Coppermills plant could leave large sections of London without water.
Governance is vital for growth
The ICAEW, ICAS and ACCA also greeted the demise of the Audit Reform Bill with dismay. Alan Vallance, CEO of the ICAEW, said he could not hide his disappointment, saying the government had “recognised that an Audit Reform Bill would increase global investor confidence in UK companies and increase the prospects of growth.”
Maggie McGhee, Executive Director, Strategy and Governance at ACCA, said “we disagree completely with the idea that the need for reform is less pressing. Businesses do not grow where corporate governance is below par.”
Gail Boag, CEO at ICAS, said more must be done to protect the public from “the wider impacts of corporate collapse”. In particular, she said “the issue of director accountability remains far from resolved, and there is an urgent need to clarify the scope of the FRC’s role and powers.”
Pension funds also protested. George Dollner, head of strategic policy at Pensions UK, was quoted in Pensions Expert saying the decision to scrap the bill was “a missed opportunity to reinforce trust, confidence and resilience in UK capital markets”. He called for reform around director accountability and audit market oversight, which he said was particularly important “at a time when pension schemes are being encouraged to invest more in private markets”.
McDougall wrote that “it remains important to have effective, proportionate regulation of audit and a regulator that has the right legislative set-up to do the job”. He added: “We will still look to put the Financial Reporting Council on a proper statutory footing, as soon as parliamentary time allows.”
However, the onslaught of criticism from auditors, internal auditors and stakeholders mean that calls for more substantial change are unlikely to go away. The Chartered IIA will continue to push the government to deliver on its promises about the FRC, but also to call for wider and deeper governance reforms. The message for government is clear – if it really wants to push growth, it can’t compromise on audit reform.