Audit overhaul unlikely before next electionby
The government is set to delay the long-awaited overhaul of the audit regime, raising concerns that the reform is not likely to be implemented before the next general election.
According to the Financial Times, ministers are expected to leave out the legislation underpinning the reform of audit and corporate governance from the King’s Speech in November.
Further delays to the already long-gestated audit shake-up will only push the reforms down the government’s list of priorities and would mean that the overhaul is unlikely to see the light of day before the next general election.
As the government runs out of parliamentary time, and the measures are no longer seen as a political priority, proposals such as the new enhanced Audit, Reporting and Governance Authority (ARGA) regulator are now likely to be pushed back to 2026 or 2027.
The switch to the new beefed-up regulator has already been beset with as many delays as other government projects in the accountancy sector.
The government first reported plans to replace the Financial Reporting Council (FRC) with ARGA back in March 2019, following the high-profile collapses of high-street retailer BHS in 2016 and construction giant Carillion in January 2018.
But after playing second fiddle to other parliamentary law changes such as Brexit, the government eventually unveiled its next steps in 2022 to reform audit and break up the Big Four dominance. The government’s Restoring Trust in Audit and Corporate Governance plans included measures to ban failing auditors and reclassifying 600 private firms as public-interest entities.
Introduced by the then business secretary Kwasi Kwarteng, the reforms were hailed by the government as ensuring the “UK sets a global standard” in audit. But at the time, the plans were criticised for being “watered down”, “a missed opportunity” and the stakeholders urged the government to accelerate the “glacial pace”.
Influence of big accounting firms
Accounting academic and member of the House of Lords, Prem Sikka told AccountingWEB that the government had indicated that there would be legislation but “nothing has ever materialised” and when he asked the minister he was told to “wait and see” and that was over a year ago.
Whether or not the situation becomes clearer after the King’s Speech in November, Sikka lambasted the lack of urgency from the government in the aftermath of scandals such as BHS and Carillion. “The FRC is regularly drawing attention to poor standards of auditing and its puny fines seem to make absolutely no difference to what the firms are doing because the same continues.”
He added: “The lack of reform is perhaps indicative of the influence of the big accounting firms and their lobbying on policymakers, but at another level, the lack of reforms inevitably will erode confidence in the audit process and the long-term future of accounting firms. So I think through their lobbying power, [big accounting firms] are paradoxically destroying their own future.”
Lack of opposition
Sikka said that the more worrying aspect of the story is that the Labour Party is not saying they will do anything either to clamp down on the Big Four audit firms, with the accounting academic citing reports that big accounting firms are providing services to the shadow cabinet.
Fellow accounting academic Richard Murphy has heard a similar lack of urgency from Labour HQ too, reporting on this blog that audit reforms are not high on Labour’s agenda either until 2027 at the earliest.
“So, audit failure that imposes enormous costs on society and undermines the credibility of the data on which our whole supposedly market-orientated society works is not an apparent issue of concern to anyone in politics, even though the evidence suggests that there is a great deal wrong in the accounting and auditing professions,” said Murphy.
However, Jonathan Reynolds, Labour’s shadow business secretary said on X, formerly Twitter: “The Conservatives have dragged their heels on audit reform for far too long. Delaying important legislation because of their own incompetence simply isn’t good enough.
“Labour supports the principles of audit reform and has been calling on the government to publish this important legislation for months.”
The current state of audit
As for the current state of audit, Sikka said it is “extremely unlikely that any auditing firm can really audit a giant corporation” but “they think by colonising the political arena, they are escaping reforms when reforms are needed.”
He added, “Audit is actually simply a means to an end and the end is somehow to comfort people. But if that confidence is eroded, ultimately the state will have to get rid of the audit firms.”
“Accounting firms have a choice: they can evolve or they can just obstruct change, and I think at the moment they are obstructing change which actually will give them negative outcomes.”
Government ‘committed to improving audit’
A government spokesperson told AccountingWEB that it will introduce legislation when parliamentary time allows and a legislative programme will be announced in due course.
“The government remains committed to improving audit and corporate governance in the UK.
“Reform is already underway - the Financial Reporting Council has transformed the way it works, is consulting on changes to the Corporate Governance Code, and now has more powers to ban inadequate auditors from reviewing large companies’ accounts.”
Meanwhile, an FRC spokesperson said: “The FRC continues to appropriately plan for the creation of ARGA when legislative time allows. In the meantime, we are pleased with the strong stakeholder support for the ongoing work of the FRC to further strengthen corporate Britain as a great place to invest and build strong businesses for the long term.”