The King’s speech today included 21 pieces of legislation that are set to shape the prime minister’s pre-election plans, but what wasn’t prioritised in that primary legislation was the audit and corporate governance reform bill.
The plans to overhaul audit have been waiting on the sidelines for some time after the high-profile collapses of Carillion, BHS and Thomas Cook exposed the audit failings of Big Four firms.
The omission of the audit shake-up from today’s King’s speech pushes any efforts to reform the audit until after the next general election. The government has committed to bringing forward the legislation when “parliamentary time allows”, but with no timetable in place, the momentum is taken out of key proposals such as the new enhanced Audit, Reporting and Governance Authority (ARGA) regulator.
ARGA on the sidelines
With the legislation to create ARGA missing from the King’s speech, the Financial Reporting Council (FRC) commented after the announcement that it will “utilise its current regulatory toolkit” to support UK businesses and promote UK corporate growth and competitiveness.
The regulator used the omission to update on a recent consultation with stakeholders on revisions to the UK corporate governance code. The FRC confirmed that it will only take forward a small “focused number of proposals ”out of the 18 proposals that it set out in the consultation and it will stop the development of the remainder.
These changes include strengthening corporate governance outcomes, improving internal controls and reducing reporting burden and duplication.
This means over half of the proposals are left on the chopping block, including those relating to the role of audit committees on environmental and social governance and modifications to existing code provisions around diversity, overboarding and committee chairs engaging with shareholders.
Lack of political will
The exclusion of audit reform was met with disappointment from across the accounting profession, with professional bodies urging the government to reconsider its decision.
Michael Izza, ICAEW’s chief executive, said the government’s promise of comprehensive reform remains “unfulfilled due to a lack of political will”.
He went on to express his disappointment about the audit and corporate governance bill being missing from the King’s speech, which he said leaves “no realistic prospect that this key piece of primary legislation will happen before the next election”.
“This comes hard on the heels of the government’s surprise decision last month to scrap new draft reporting regulations that the regulator and the accountancy profession had been working on for years.
“The attractiveness of the UK as a place to invest and do business is firmly based on the high quality of corporate transparency, governance, reporting and audit in this country. The government’s faint-hearted attitude to protecting and maintaining that reputation does the economy no favours.”
This sentiment was echoed by Bruce Cartwright, the CEO of the Institute of Chartered Accountants of Scotland (ICAS). “This feels like groundhog day,” he said. “Again, we see lack of action by a government apparently committed to reform but again backtracking on those commitments. The result is to potentially undermine public trust in that as a business community, we demonstrate transparency in business and do the right thing.”
He added that the omission is a “huge blow” to the interests of UK businesses and the public and noted that it comes shortly after the government pulled its draft regulations to enhance the UK’s corporate reporting framework in October.
“There is consensus among all the key players that these reforms are long overdue. UK businesses need a solid, regulatory environment to ensure good governance and to maintain the public’s trust,” said Cartwright. “Audit and corporate governance reform can’t wait until after the next general election.”
Audit reforms
Plans to reform audit have been in the works since Carillion collapsed six years ago. The government set out its plans to restore trust in the audit regime in May 2022 following a consultation, noting that the reforms would “ensure the UK sets a global standard”.
The reforms included the creation of ARGA, and a new threshold for public entities which would bring only 600 more companies under regulatory scrutiny.
However, the reforms were branded a “missed opportunity” by commentators for not introducing a version of the Sarbanes-Oxley reporting regime and there were complaints that the plans were moving at a “glacial pace”.
The exclusion of audit reform from the King’s speech was expected, after plans were leaked in early September.
