Corporate reporting – a surprising U-turn from government

Just a few weeks ago, Britain’s accounting regulator fined KPMG a record £21m for a "textbook failure" in audits of Carillion, the builder that imploded in 2018, owing subcontractors and other suppliers an eye watering £7bn.

The devastating collapse, along with those of Patisserie Valerie and BHS, prompted a root and branch review of auditing and corporate governance standards in the UK.

Years of work followed – consultations with businesses and investors; investigations by expert committees and regulators; a white paper. This was all distilled into a piece of secondary legislation, the Companies (Strategic Report and Directors’ Report) (Amendment) Regulations 2023, that was put before Parliament on 19th July and was about to be debated in the House of Commons.

The draft regulations proposed four new duties for directors of large companies – those with more than 750 staff and a turnover of more than £750m.

  1. An annual “resilience” statement setting out how a company was managing risk and maintaining resilience over the short, medium, and long term.
  2. A statement of distributable profits, the money available to pay dividends to shareholders, and details of the company’s future distributions policy.
  3. A fraud statement, detailing measures taken to prevent financial crime.
  4. Once every three years, a statement on audit and assurance, explaining how the company proposed to gain assurance about the robustness of internal controls and corporate reporting.

These new reporting requirements were seen by many governance experts as a relatively ‘light touch’ response to what happened at Carillion, BHS and the other failed companies. Although not a panacea in themselves, they attempted to address, as part of a larger programme of reform, some of the governance failings that had emerged from these cases.

The new regulations were walked all the way down the aisle. But, on 16th October they were jilted at the altar by Kemi Badenoch, the business secretary, who suddenly withdrew the “burdensome” legislation.

The Department for Business and Trade said the decision was taken after companies had raised concerns about the cost of the new corporate reporting requirements. Only a few days earlier, legal action by the Insolvency Service against five former non-executive directors of Carillion had been dropped.

It was another surprising policy U-turn by the government, coming just weeks after ditching the northern leg of HS2. It adds to the sense that the government is unable to follow through with its own commitments.

The IoD shares concerns about the volume of reporting requirements faced by UK companies, but the government’s unwillingness to follow through with long-expected reforms is a source of uncertainty for business.

A letter to the Financial Times, signed by five luminaries of the investment community, including Sandy Peters, senior head advocacy at industry body the CFA Institute, summed up the feelings of many who have contributed to the regulatory overhaul: “This agenda has been in the works for at least five years, and the UK government has asked investors and many other stakeholders to devote considerable time and attention to providing input. With economic pressures on business making accounting abuse more likely, requirements to improve corporate governance and reporting on financial resilience, fraud prevention and dividend-paying capacity seem both wise and timely.”

Others in the City took a different view. Julia Hoggett, chief executive of the London Stock Exchange, said: “This is a welcome step and will boost the competitiveness of the UK. Good corporate governance should be an enabler for companies to grow and reach their full potential in the interests of all stakeholders. However, founders, company boards and, increasingly, shareholders have highlighted that the UK’s approach of ever-increasing corporate governance processes has, however well-intentioned, impacted the effectiveness of listed companies and the standing of the UK over other capital markets.”

Burkhard Keese, chief financial officer at Lloyd’s, added: “We welcome this first step that the government is taking to ensure that the UK has a proportionate and competitive corporate governance framework and look forward to ongoing collaboration as its work continues in this area.”

The sudden volte face prompted some to ask what has changed since prime minister Theresa May’s 2016 speech at the CBI annual meeting, where she noted ‘when a small minority of businesses and business figures appear to game the system and work to a different set of rules, we have to recognise that the social contract between business and society fails and the reputation of business as a whole is undermined’.

Rishi Sunak’s bonfire of the regulations gives him some red meat to throw to those on the right of his party in order to keep them happy, for now.

The Prime Minister may also be making the political calculation that corporate governance is not going to be the vote winner that is going to cut through with the British public at next year’s general election.

Until then, he may have his fingers crossed that the next corporate ‘textbook failure’ isn’t lurking around the corner.

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