Government acting too slow on audit reform promises following Thomas Cook collapseby
An influential panel of MPs has said the government is “dragging its feet” over reform to the audit sector and is taking too long to set up a new accounting regulator.
Members of the Business, Energy and Industrial Strategy (BEIS) select committee have criticised the government’s response to its report on the failure of Thomas Cook, a year after the travel company collapsed.
The scrutiny panel said ministers must fast-track a series of urgent changes, including limits on bonus schemes, adding provisions to 'claw back' payouts if a company goes bust and standardising certain accounting practices.
“Recent audit scandals highlight the need for the government to tackle this issue as a matter of urgency,” said Darren Jones, chair of the BEIS committee said. “At a time when businesses are facing tough trading conditions and when their balance sheets are under significant pressure, it’s important investors and other stakeholders can have confidence in audits.”
He said while the government has a series of priorities at the moment, given the importance of audit and the fact the department already has a raft of practical audit measures “sitting on its desk gathering dust”, the business department must “show more urgency” and drive through the reforms needed on audit and on corporate governance.
MPs said the government must speed up its plan to replace the Financial Reporting Council with a more powerful regulator, the Audit, Reporting and Governance Authority (ARGA). However, ministers refused to give an updated timetable for the new ARGA, stating it would be brought in “as soon as Parliamentary time allows”.
When questioned, business secretary Alok Sharma declined to give a date for when legislation to trigger audit reform would be introduced.
Thomas Cook went under last September after it failed to secure a £200m lifeline from its bankers and the government refused to step in to help.
Questions were raised after it emerged bosses banked £47m in pay and bonuses in the years before it folded despite the dire financial state of the firm, triggering the investigation.
The BEIS report on Thomas Cook included a number of recommendations on corporate governance, executive pay and bonuses, and audit reform. It was published following the Brydon review of audit, the Competition and Markets Authority review and the Kingman review of the FRC.
Coronavirus discord knock-on
MPs said the financial volatility hitting markets following the coronavirus pandemic made it more important than ever to ensure people trust the audit profession and it is being held to high standards.
Industry experts said the moves to introduce change are broadly welcomed by the sector, but the ongoing coronavirus crisis has understandably led to some delays.
“There is a large amount of work to be done to ensure that the findings and recommendations from the three recent reports are reflected within the changes,” said Jacqui Waring, audit director at Goringe Accountants. “Recent failures show that auditors need to challenge their clients more on key judgements, such as going concern and the regulator needs to ensure this is happening.”
Changes since, such as separating the audit function and more closely linking audit partner remuneration to audit quality, are helpful in achieving a more independent audit outlook, she said.
“Audit firms must also ensure that they are doing enough in terms of training and process improvements for staff at all levels to improve audit quality,” added Emily Crowson, head of statutory accounting at Goringe Accountants.
Since the collapse of Thomas Cook there have been further high profile cases of auditors signing off accounts that have later thrown up problems, such as the recent criminal scandal around payment processor Wirecard where it emerged £1.7bn was missing from its accounts.
“This is a common issue and one that needs to be addressed, so it’s pleasing to see this being enacted,” said Rick Smith, managing director of Forbes Burton, an insolvency and business rescue specialist.
Public interest auditing
The report calls for several recommendations, including a major reform of the audit sector in general, he said, which means the creation of a stand-alone and transparent audit profession, rather than as an adjunct to the accounting profession, to be governed by overarching principles.
“This will be formed alongside the redefinition of what an audit, and its purpose, actually is,” said Smith. “It will now mean that greater clarity will be provided regarding who audit is for and reinforcing its role as a public interest function.
It also includes an obligation on auditors to inform and the need to be suspicious as well as sceptical, he added, alongside the opportunity to extend auditing beyond merely examining financial statements, to reflect the wider interests of everyone who depends on the company’s ongoing viability.
“It also introduces the idea that the clarification that auditors should endeavour to find corporate fraud and there’s also a requirement that they undertake education in forensic accounting and fraud detection, something that simply wasn’t there before,” said Smith.
He backed the report’s calls for a step-up in auditor transparency, with new requirements to publish their profitability from audit work and the remuneration of statutory auditors.
“To firm this transparency up, there’s also a need identified in there to value the opinion given by auditors and to offer greater granularity of information about estimates,” said Smith. “Included in the report too are suggestions that mechanisms to encourage greater interaction for shareholders with the audit process needs to happen, including the ability to pose questions to auditors at the AGM.”
The recommended changes will have a direct impact on firms and directors, Smith said, so they need to prepare themselves for “more in-depth scrutiny of their accounts and their actions” which include new reporting requirements for directors about resilience, public interest and audit policy.
“This is especially true of another recommendation here, which suggests that there will be a responsibility for directors to explain the actions they have taken to prevent material fraud and to report on internal controls,” he said.