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U-turn | accountingweb | U-turn on governance disclosure rules ‘risks a repeat of Carillion’

Corporate governance U-turn risks Carillion repeat


The government has scrapped a series of corporate governance disclosure reforms, prompting accounting experts to note it will do nothing to stop another Carillion-style collapse.

25th Oct 2023
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“Burdensome” legislation designed to strengthen corporate reporting requirements and overhaul audit has been pulled by the government following lobbying by big business. 

In a statement, the Department for Business and Trade said the plans, which were only formally proposed in July, had been scrapped after consultation with companies who “raised concerns about imposing additional reporting requirements”.

City of London financial groups including the London Stock Exchange and Lloyds, and finance lobby groups Capital Markets Industry Taskforce, UK Finance and TheCityUK, praised the government’s decision.

Ministers said they remain committed to reform of audit and governance standards, despite the U-turn, which accounting experts said was “unexpected”.

Business secretary Kemi Badenoch said the move would “reduce the burden of red tape to ensure the UK is one of the best places in the world to do business”.  

New authority

“The government remains committed to wider audit and corporate governance reform, including establishing a new audit, reporting and governance authority to replace the existing Financial Reporting Council [FRC],” the business department said. “We will bring forward legislation to deliver these reforms when Parliamentary time allows.”

Ministers said a “wider package of reform” will be presented by the government “to streamline and simplify regulation for businesses”.

Shelving the draft secondary legislation is the second time much-vaunted reform of the audit sector has been watered down. Long-awaited primary legislation designed to tighten boardroom rules and update audit standards is expected to be omitted from the King’s speech next month.

The scrapped legislation would have introduced multiple new corporate reporting requirements for large UK companies, including resilience statements and assessments of material risk of fraud.

It would also have forced the businesses with over 750 employees and turnover of more than £750m to disclose their distributable profits, and explain whether disclosures on metrics such as their carbon emissions would be independently audited. 

Bad timing

Critics lambasted the decision, which came a week after KPMG was given a record £21m fine for a “textbook failure” in audits of Carillion, the construction firm that collapsed in 2018 and triggered the broad review of auditing standards.

The announcement “places the government’s longstanding reforms of audit and corporate governance in disarray”, said Dr Roger Barker, director of policy and governance at the Institute of Directors, which represents company board members. He added that it was “a further sign that the government is pulling back from reforms announced in the wake of the collapses of Carillion, BHS and Patisserie Valerie”.

“While the headline from government is that they want to make the UK more competitive, there must be a recognition of the quid pro quo,” said Julia Penny, former Institute of Chartered Accountants in England and Wales (ICAEW) president and director of her own practice. “These amendments had been in response to the Carillion failure and were designed to help prevent a recurrence.”

She said while disclosure cannot stop companies failing, “a lack of regulation here puts all the responsibility back onto the directors, the finance professionals within the company and the internal and external auditors”.

“If they all do a good and diligent job, then everything should work well, barring the natural risks that businesses face, but any failure risks a repeat of Carillion,” she said.

ICAEW managing director of reputation and influence, Iain Wright, billed it as “a major blow to those seeking to drive improved transparency and trust in UK corporate reporting”.

It also “appears to signal an end to the UK process of audit and corporate governance reform initiated after the demise of Carillion, and it is to be regretted”, he added.

As you were

Audit specialists are advising clients to look past the decision and continue to work towards more robust corporate governance reporting.

“While uncertainty remains with the recent withdrawal of the secondary legislation, we think it is important that companies still consider early the potential changes to their responsibilities around risk management and internal control – as are being proposed in the FRC’s recent consultation on the UK Corporate Governance Code,” said Andrea Christou assistant manager at PwC UK, financial services risk advisory. 

The laws were never the driver for making improvements to governance, said Michael Stallard, BDO partner, as the majority of organisations “with programmes in flight are continuing”.

“Most organisations started these programmes because they see the benefits of a stronger control environment, better board visibility and more targeted assurance,” he said.

“In essence, the shelving of legislation should be an opportunity to recalibrate your strategies rather than a cause for stagnation,” he said. “It invites stakeholders to demonstrate resilience and adaptability in the pursuit of a corporate governance framework that reflects the evolving expectations of a responsible and conscientious society.”

Replies (8)

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paddle steamer
25th Oct 2023 15:30

Is this the post Brexit "Singapore in the Channel Solution", UK unbound approach?

If so it is a short lived benefit, if regulation is not sufficient then shareholders will stop buying shares in the market if more likely to be burned there than elsewhere- I now never buy Hong Kong listed shares having once been burned by one listed there (well duel listed on UK Aim) , it had interesting revenue recognition ideas. I should have spotted the poor cash conversion but I was younger and more trusting of the auditors (A Hong Kong firm connected internationally, I suspect by name only, with the UK firm with whom I trained)

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By vstrad
26th Oct 2023 10:47

Anyone who thinks the malfeasance and incompetence that featured at Carillion can be prevented by some additional box-ticking has a very naive view of human nature.

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By Edward Beale
26th Oct 2023 10:53

The problem with Carillion was poor Governance compounded by poor management information provided to the Carilion board so that strategy was not changed on a timely basis. This was spotted (and acted on) by diligent investors who found the inconsistencies in Carillion's reporting.

Institutional investors should not be relying on slow moving legislation to obtain improvements in corporate reporting. By acting collectively investors can change expectations of best practice reporting in much shorter timescales. They can "name and shame" companies with poor reporting even if their investment mandates do not allow them to sell those companies.

If institutional investors want changes in reporting they should be acting directly and collectively rather than claiming that they do not have the time/resources and outsourcing the issue to regulators or legislators.

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By Springfield
26th Oct 2023 11:13

Charlie Munger had it right - "Show me the incentives and I'll show you the outcome."

Corporate fraud often begins when someone realises that if they can adjust, fudge or otherwise falsify the figures, they can earn enhanced salaries, bonuses or inflated share awards. It can start with just an idea that you can bring profits forward into this year instead of next, and it will unwind itself next year. But then the pressure's on to repeat the trick, more and more people are invested in the false position until eventually the whole house of cards comes tumbling down with trade creditors, the pension fund, shareholders and the tax payer left paying the price.

Copious legislation and endless and detailed auditors statements published months after the year-end are never going to prevent this behaviour, and offer no protection.

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By PChapman
26th Oct 2023 11:35

This is disappointing!

Then again; the proposals have been watered down successively so why am I suprised!

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By unclejoe
26th Oct 2023 12:46

If government are serious about reducing fraud and wrongdoing they would do better to focus on implementing the rules and systems we already have and handing out meaningful punishments including imprisonments to miscreants. I know of numerous corporate frauds that have been reported to the FCA where absolutely nothing is done. The FCA are chocolate teapots. Directors/auditors/advisers - all in a cosy club!

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By matthewleitch
26th Oct 2023 12:47

Successive attempts to improve reporting related to 'risk' have produced disappointing results because those writing the rules and their advisors have not understood enough about risk and its management. It looks rather as if the latest (now dropped) attempt is no different.

In the background has always been the idea that a risk register will be used and that will take care of most of the risk management needed. But this method has been in place in all the major failures and it still does not work. Rebranding it as ERM, a risk appetite framework, or resilience does not change the basic issue.

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By 2TunTed
26th Oct 2023 17:15

My reading of this is that the prisons accommodation crisis is worse than we thought and this is just another strand of reducing the pressure on the prisons. Odd really as very very few directors get sent to prison or even prosecuted no matter how heinous their corporate misdemeanours.
If the UK is such a great place to do business, good and fair regulation should be part of the offer and those who abuse it, properly dealt with. We seem to be establishing a new service economy activity of shutting stable doors after the occupant(s) have bolted.

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