The U.K. government has retreated from planned efforts to overhaul public audit rules that were promised to help prevent corporate scandals such as those at Carillion, BHS, and Patisserie Valerie from repeating.
Last week in a speech to open Parliament, King Charles omitted mention of an audit reform bill from his remarks, which many took as a sign that the promised legislative and regulatory changes have no prospect of being implemented before the next election.
Meanwhile, U.K. financial watchdog Financial Reporting Council (FRC) has revealed it plans to drop many of the proposals it said would help strengthen company governance. Richard Moriarty, chief executive of the FRC, said it would proceed with a “small number of the original 18 rules” and stop working on the rest. The decision, he said, was taken in view of the regulator’s new requirement to “support U.K. economic growth and competitiveness.”
Many audit oversight groups were critical of the reversal. “ICAEW is concerned that without primary legislation for proposed reforms—which were to include establishing a new regulator, the Audit, Reporting and Governance Authority on a statutory footing—the ability of the existing Financial Reporting Council (FRC) to properly oversee company directors will be severely compromised,” the Institute of Chartered Accountants in England and Wales said in a statement.
The FRC will also drop plans for company audit committees to have extra responsibilities for reporting on environmental, social, and governance issues. The FRC said it plans to unveil the new code in January 2024 and will allow more time for the new rules to be implemented.
ICAEW Criticizes the Lack of Progress on Audit Reform
ICAEW Chief Executive Michael Izza has long expressed frustration at the government’s lack of ambition on audit reform and over the summer raised this issue with Minister for Enterprise, Markets and Small Business, Kevin Hollinrake MP, and Shadow Business and Trade Secretary, Jonathan Reynolds MP. Izza believes the current economic climate means that the lack of progress on audit and corporate governance legislative reform could pave the way for further corporate collapses.
“We won’t be able to handle the next Carillion-like event any better than we did the last one. And the pressures in the marketplace that the primary legislation was intended to deal with – oversight of directors, competition, quality – will remain unresolved. These are issues that will need to be tackled by a future government.”
Without primary legislation, the FRC cannot take on a bigger role in policing directors or introduce measures to increase competition in the audit market – such as the proposed implementation of managed shared audits for UK-registered FTSE 350 companies.
In its submissions to the Kingman and Brydon reviews and Competition and Markets Authority market study, ICAEW has repeatedly warned that momentum on audit reform is in danger of being lost, despite being vital for investor confidence.
“Instead of being able to speak with international investors about how the UK’s corporate governance is well suited for the opportunities and challenges of the coming decades, businesses have instead been waiting for the government to find the parliamentary time to deliver its audit reform legislation,” Izza says. 