‘Once in a generation’ audit reforms published

The department for Business, Energy and Industrial Strategy (BEIS) has launched a major overhaul of audit and corporate governance, setting out the government’s strategy to break up a perceived dominance of the Big Four, avoid company failures and maintain the UK’s reputation as an investment hub.

The proposals, released today in a report spanning more than 200 pages, outline the government’s intention to reduce the dominance of the Big Four accountancy firms in the FTSE 350 through “managed shared audit” while also making directors of the UK’s biggest companies more accountable in the case of failings through beefed-up fines and suspensions. There will now be a 16-week consultation period on the proposals.

In a statement business secretary Kwasi Kwarteng said corporate collapses and auditing scandals like Carillion, BHS and Thomas Cook had shown that reform was necessary, while it was crucial that the reforms to the sector build trust.

“By restoring trust in our corporate governance regime and encouraging greater transparency, we will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country.”

At a glance: Audit reforms

Improving the audit market

Restoring confidence in audit

Company director accountability

Big Four reaction

Among the Big Four firms, there was broad optimism that the audit reforms would begin the process of rebuilding trust in a sector weighed down by scandal and government inaction in recent years.

The white paper marked a “key milestone” said Deloitte UK managing partner, Stephen Griggs in an email.

“We’ve been consistent in our support for reform as the need for change is clear. It is important that changes in audit are complemented by reforms to the governance of the UK’s largest and most complex businesses and those with a significant impact on public interest,” he added.

KPMG UK’s head of audit Jon Holt went further, calling it a “once in a generation opportunity”.

“It is an ambitious package of strategic reform. Prioritising and clarifying the audit reform agenda is an important step to rebuild trust in the profession. Establishing ARGA, with broader responsibilities, is key,” he said in a statement.

EY UK chair Hywel Ball said the government was right to proceed with Sir Donald Brydon’s key recommendations from his December 2019 review.

“For audit to serve a broader set of stakeholders and keep pace with changing expectations, the scope of audit needs to be expanded and clarified on areas such as Environmental, Social and Governance reporting, and fraud,” he said, in a statement.

There was a call for further action however, as Ball urged the government to maintain momentum and avoid a piecemeal approach to reform the sector.

“A sense of disappointment”

Mazars’ UK head audit, Bob Neate says he’s glad the proposals are “finally” out, but has expressed disappointed that managed shared audit was preferred to joint audit.

Joint audit was recommended in a Competition and Markets Authority (CMA) report back in April 2019.

“The CMA looked at both managed shared audit and having a market cap approach and it discounted both because it didn’t believe either would have the benefit for truly changing the market that joint audit would,” Neate says.

Audit tech vendor Galvanize, referenced in the Brydon report as an enterprise-class audit automation provider, said in an email that at first glance, the government’s proposals look “robust”.

“Ensuring the UK is an attractive destination for business investment and growth is crucial for a confident, post-Brexit Britain,” added Keith Fenner MD EMEA at Galvanize. “The government’s challenge is to balance this with the needs of investors, employees and consumers who rightly demand high levels of corporate responsibility and governance.”

John Wood, CEO of the Chartered Institute of Internal Auditors and Michael Izza, ICAEW chief executive, called on the government to act quickly on the back of the proposals.

“It is disappointing that there is no detailed legislative timetable in the white paper and we need to see a clear roadmap for reform without delay or else we risk further corporate collapses,” Wood said in an email.

“Pushback” on director responsibility expected

There is expected to be significant pushback in the case of company director accountability.

“Making a director financially liable is likely to be resisted, but it is reasonable to make directors responsible for personal dishonesty,” said Fenner. “However, risks and errors can be beyond their control so careful thought must be given to how this will work. Overall, the government’s proposal looks robust and if this leads to more secure, resilient, predictable businesses, this will give directors the confidence to take educated risks, invest and innovate, whilst also giving wider stakeholders the assurances they need.”

Neate says he expects “pushback and concern” as directors are forced to take on more responsibility.

Conservative MP Steve Baker described the audit reforms as a “positive step forward” but that he will await with interest the response by experts, “including those behind the famous ‘Shareholder Spring’.”


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