Corporate governance U-turn risks Carillion repeatby
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.
“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”.
“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.
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.”