Audit reform omission shows it is ‘not a priority’ for government

Audit reform omission shows it is ‘not a priority’ for government

Ministers had committed to overhauling the audit and corporate governance systems in response to scandals at companies like retailer BHS in 2016 and Patisserie Valerie in 2019

Audit reform omission shows it is ‘not a priority’ for government

The accounting industry is disappointed but ultimately “not surprised” at the news that UK government officials are likely to postpone the scheduled restructuring of the UK’s audit and governance regime, senior market participants have argued.    

Ministers are set to shelve the long-awaited overhaul due to worries that the government may not have sufficient time to secure parliamentary approval for the alterations, according to the Financial Times. The legislation that was originally scheduled to be introduced in the King’s Speech this autumn, is now expected to face a delay or postponement.  

Mike Suffield director of policy and insights at ACCA says: “All those involved know that the reform debate has been going on far too long and we see this omission from the King’s Speech later in the year as yet another missed opportunity. And that is a source of frustration, especially as there is so much consensus now around the changes required.”  

This is echoed by John Boulton, director of policy at the ICAEW, who states it is a “disappointment” that the reforms “which have been well developed over a number of years on targeted areas that result from that extensive consultation and input from stakeholders are not being taken forward at the current time”.  

Ministers had committed to overhauling the audit and corporate governance systems in response to scandals at companies like retailer BHS in 2016 and Patisserie Valerie in 2019, with industry bodies such as the ICAEW demanding reform for some time.  

“The problem has been the inability of the government to find parliamentary time for the legislation, which would appear to indicate that this reform is a low priority issue for it,” states Suffield.    

With a general election approaching, Boulton says he will be watching closely to see whether it features in party manifestos.   

“The question will be the extent of the nature of the policy commitment that parties would make to it. Whether the centrepiece of that is a strong and statutory regulator that includes additional powers over all free parts of the system, directors reporting and auditors.” 

Trust in UK audit ‘damaged’  

In addition to the string of high-profile audit failures, which are generally regarded as the key catalyst of the industry overhaul, the Financial Reporting Council (FRC) also handed down hefty sanctions to Big Four players KPMG and PwC for their audits of Eddie Stobart Logistics in 2017 and 2018. 

According to Suffield, such sanctions serve as further evidence of the dire need for audit reform UK. “Rightly or wrongly, trust in audit in the UK has been damaged by high profile corporate failures,”  he says. 

In order to restore trust, the government must focus on “three elements” which are directors, prepares of report“and following years of consultation it would be a “pity” for it not to be officially implemented, says Boulton.  

Replacing the FRC 

The Kingman review, published in December 2018, advised that the FRC should be replaced by a new, independent body with more powers to strengthen the UK audit market.  

The new regulator was to be named the Audit, Reporting, and Governance Authority (ARGA) and was intended to be the centrepiece of the reforms.   

Suffield and ACCA maintain their confidence that the government shares a similar perspective on the need for reform within the audit profession, aiming to establish a new regulator that drives and promotes high-quality standards. 

 Boulton argues that, with continuing evidence of the SEC’s “clear focus” and demonstration that it is a “respected and effective regulator”, it is a “pity that this element of the reforms [ARGA] is not going to happen in the near term”. 

“These are the kinds of measures that need to be taken,” he says. “But I expect that this will come back around after the next General Election – these are the kinds of things that policymakers will want to implement.” 

 

 

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