The Department for Business, Energy and Industrial Strategy (BEIS) reaffirmed its intention to publish the long-awaited reforms on audit and corporate governance imminently.
“Strengthening our corporate governance and audit regime will help to ensure that the UK remains a world leader in corporate transparency and advance its status as a place of the highest standards in audit,” a UK government spokesperson said in an email to Accountancy Age.
“The Government has accepted the findings of three independent reviews into audit and corporate reporting, and is committed to acting on their recommendations.
“The Business Secretary has been clear that audit reform is a priority for the department and we will publish comprehensive proposals shortly.”
However, it is worth noting that the proposals were set to be published imminently last month, after a report by the Financial Times on February 4 said they could be out the following week. But nearly a month has passed without progress.
‘Not the time to delay’
Leaders in the audit sector called on the government to “maintain momentum” on reform, despite the parliamentary timetable consumed by concerns around the roadmap out of lockdown and the Budget.
Mazars’ global head of audit, David Herbinet said in an email: “We must not delay on audit and wider governance reform any longer. There have now been four Secretaries of State since the reform process began, yet we are still faced with the reality that one of the existing dominant firms leaving the market would seriously destabilise capital markets, as Arthur Andersen did less than 20 years ago. This must be addressed at the soonest opportunity.”
The Brydon report was published in December 2019 but since then little progress has been made. With numerous false dawns in that time, it is unsurprising that the sector is anxious to see the white paper.
“Now is not the time to delay audit and corporate governance reforms,” said John Wood, chief executive of the Chartered Institute of Internal Auditors (CIIA) in an email.
“It has been over three years since the collapse of Carillion, and since then we have seen a series of other high-profile corporate collapses linked to audit and governance deficiencies. It is therefore imperative that the government moves swiftly, and publishes the white paper without further delay,” he added.
Hywel Ball, chair of EY UK, said in a statement in response to the Financial Reporting Council’s (FRC) update on the operational separation of audit: “It’s vital the government maintains momentum on corporate governance and audit reform to continue this legacy and ensure the UK remains competitive and attractive in this decade and beyond.”
Paul Winrow, technical partner at MHA Macintyre Hudson, said a quick outcome was in everyone’s interest.
“There is a desire for reform, from both within and outside of the audit profession. The profession is gearing up for the changes ahead and it would be helpful to have the proposed reforms released soon, especially as we understand that there will be an extended consultation period given the scale of the proposals,” he added.
Crowe’s head of audit, Steve Gale agreed, saying in an email that the reforms should not be delayed and that the best path for the government to take is to issue the consultation paper and use the evidence from that process to determine the final and necessary legislative changes.
Keith Fenner, managing director EMEA for audit tech vendor, Galvanize said in an email that it was important the sector had “clarity” over its future and, providing the reforms were not merely a “box ticking exercise”, they should be published as soon as possible.
“If the reforms encourage greater stakeholder engagement with audit, and therefore deliver more effective audits, I can’t see why they would want to delay,” Fenner said.
Fears over director responsibility
Of the estimated 200-plus pages of recommendations, the new stipulation that directors of companies be held personally responsible for the accuracy of their financial statements, incurring fines and bans for major failures, has rattled business leaders.
Fenner sympathises with business leaders, saying that they are under extreme pressure due to the coronavirus pandemic and urged the government to ensure all reforms are proportional and add value.
“[The government] should encourage an effective controls programme, that results in compliance rather than being driven by it. In turn, if risk is better managed you will have a more secure, resilient, predictable business which gives you the insight and confidence to take risks, to invest for recovery and to innovate,” Fenner added.
He also said that directors were not resistant to change but were concerned about how the new rules would be enforced.
“Sometimes risks and errors can be beyond their control. Additionally, it is not clear whether all directors would be equally responsible and this may be causing hesitancy. That is why we advocate for a right-sized approach, that does not need to hinder innovation and initiative.”
Wood believes some company directors are fearful of the reforms overburdening. However, he argues that the economic fallout from the pandemic is exactly why reforms are needed, and needed fast, to help businesses better manage risk.
Herbinet cautioned the government against simply mirroring the Sarbanes-Oxley (SOX) regime in the US but emphasised that reform is still needed.
“Boards should have a stronger role in corporate governance, and this can be achieved by strengthening reporting controls through the UK Corporate Governance Code without the expense or complexity of a rules-based UK imitation of the US SOX regime,” he added.
“Exactly how to balance effective governance with entrepreneurship should be the government’s primary focus as it considers submissions to its consultation.”