The Audit Reform and Corporate Governance Bill

Kill Bill

Buried in the 13th paragraph of the release on January 20th was just one line: “The Government is also scrapping the Audit Reform Bill to avoid significant new costs for large firms.”

It felt anticlimactic for the years of work put in by regulators, industry bodies (including the IoD), a White Paper and four big reviews into the audit sector – by Sir John Kingsman, the Competition and Markets Authority (CMA), the Business Energy and Industrial Strategy (BEIS) Select Committee and Sir Donald Brydon.

A letter from Blair McDougall, minister for Small Business and Economic Transformation, to Liam Byrne, chair of the Business and Trade Committee, revealed it was abandoning the audit industry overhaul for three main reasons:

1) The government wants to achieve growth by removing regulation, not adding it.

2) Auditors and the FRC have made many improvements since 2019.

3) Parliament’s schedule is limited, so something had to go.

One official told The Financial Times that ministers believed audit quality had improved sufficiently since Carillion’s failure in 2018, arguing the bill was “not the best use of our legislative time” and did not align with the government’s broader push to cut regulatory red tape.

The prime minister and his cabinet colleagues can only hope they have made the right judgement to sideline eight years worth of work.

Weak Foundations

When construction giant Carillion collapsed on 15th January 2018, it left a trail of devastation across the UK economy and lingering questions about the role of the board, its auditors and the government – one of its biggest customers.

Carillion was the UK’s second-largest construction company, with 43,000 employees. In March 2017, it reported annual sales of £5.2bn and its market value was close to £1bn. A year later, it had gone bust – leaving 30,000 unpaid subcontractors.

The contractor’s demise was followed by several other high-profile corporate failures linked to weaknesses in audit and governance – such as BHS, Patisserie Valerie, Thomas Cook and Wilko.

These collapses initiated a conversation about corporate governance and audit oversight that led to four big reviews of the sector (see above). The reviews made ambitious recommendations, including proposals for joint audits and for the Big Four firms (KPMG, PwC, EY and Deloitte) to completely separate their audit divisions from other services.

In Labour’s first King’s Speech, in 2024, Sir Keir Starmer’s government promised an audit reform bill that would:

• Replace the Financial Reporting Council (FRC) with a new Audit, Reporting and Governance Authority (ARGA).
• Expand the regulator’s remit to large private companies as well as listed ones – so called public interest entities (PIEs), that would subject them to tougher audit scrutiny, and sought to increase competition by requiring joint audits involving smaller firms.
• Give a new, more powerful watchdog the powers to investigate and sanction company directors as well as auditors.

This latest government u-turn means these plans will no longer go ahead.

The Backlash

The Chartered Institute of Internal Auditors wrote to Peter Kyle, the business secretary, to express “profound disappointment” at the decision to scrap the bill. The letter was co-signed by several other well known business executives, academics and industry bodies, including the IoD.

It said: “This represents a significant step backwards, particularly after the commitment made in the King’s Speech to publish a draft bill. After years of delay, this latest announcement is extremely concerning.

“If the government is serious about driving growth and delivering economic stability, it must act to prevent further avoidable failures through stronger oversight of our largest companies.”

The accountancy profession also expressed frustration at the move and called for fresh commitments from the government to press ahead with its promises to giver the regulator the powers to do its job more effectively.

Alan Vallance, chief executive of the Institute of Chartered Accountants in England and Wales (ICAEW), said: “We cannot hide our disappointment that after many false dawns, the government has decided to scrap the Audit and Corporate Governance Bill. The government had itself recognised that an Audit Reform Bill would increase global investor confidence in UK companies and increase the prospects of growth.”

He agreed that the changes the profession has made over the last eight years, audit quality and company governance and resilience are “in a very different and vastly improved place”.

Vallance added: “The final piece in the puzzle is to give the FRC as regulator all the tools it needs to carry out its job … to ensure these specific powers are granted and that the UK is the best place in the world to attract global investment.”

Gail Boag, chief executive of the Institute of Chartered Accountants Scotland, echoed these sentiments, branding the move “deeply frustrating”.

Conclusion

The policy reversal comes despite reassurances given to the sector as recently as September, when the Department for Business and Trade told the Business and Trade Committee it would open a fresh consultation on the bill’s main proposals.

It’s not as if worries about the quality of audit and accounting standards have gone away. Indeed, there have been a string of high-profile problems at large listed companies, which have sparked regulatory investigations. These include alleged breaches of independence rules and accounting standards during EY’s audits of Shell and the Post Office respectively, while the watchdog is weighing whether to probe PwC for its audit of WHSmith.

Given these ongoing issues, the decision to shelve the bill looks increasingly like a political gamble to “get the barnacles off the boat”, as Conservative strategist Lynton Crosby famously advised David Cameron in order to focus on the key issues and sideline the distractions.

Ministers can only hope the pro-growth punt doesn’t backfire. The British economy can ill afford another Carillion-style collapse.