Share this content
Polar bear on ice
iStock_seppfriedhuber_bear_on_ice

Outrage as government signals audit reform on ice

by

“Priority” audit reforms have been bumped from the government’s list of incoming legislation, surprising few but angering many within the accounting sector.

6th May 2022
Share this content

The wait goes on for reform of the UK audit market.

Although earmarked as a “priority”, there will be no draft bill in the forthcoming Queen’s Speech of the proposed regulatory changes that include a new watchdog, competition caps and shared audits.

Government officials have briefed the media that the legislation has been dropped from Her Majesty’s list on 10 May when she announces the bills to go before Parliament.

Back in 2021, business secretary Kwasi Kwarteng said the transformation of the audit market from top to bottom and addition of a new regulator was one of his priorities when he unveiled a white paper detailing some of the intended changes.  

High-profile corporate collapses from outsourcer Carillion to retailer BHS and travel giant Thomas Cook all shared a common theme: failures in accounting and the involvement of the Big Four firms, PwC, Deloitte, EY and KPMG. 

Clean-up proposals

Following much public, shareholder and parliamentary anger, multiple reviews into the failing state of audits were carried out and a number of proposals to clean up the industry were floated.

The government promised to end the dominance of the Big Four while empowering smaller firms to step up and take a share of the audit market with new laws that paved the way for shared audits and limits on jobs for larger firms.

To the anger of many, the proposals that were classed as “potential subject of legislation” have been passed over for matters such as privatisation of Channel 4 and various employment-related bills. 

Not a priority

Reaction from the accounting sector was fast and furious.

“The recent news that audit and corporate governance reform will be dropped from next week’s Queen’s Speech is deeply disappointing,” said Mike Suffield, director at the ACCA. “Given the uncertain state of the economy now, with rising inflation, that trust in the system is more important than ever.”

Three years have passed since the government first proposed replacing the “toothless” Financial Reporting Council (FRC) with a new regulator, and giving the enforcement arm of the Audit, Reporting and Governance Authority (ARGA) more power to tackle misconduct.

Further delays insinuate that the “Big Four have become increasingly unaccountable,” said audit expert Processor Atul Shah of City, University of London. “Society will continue to pay a heavy price,” he told AccountingWEB. 

“It’s very disappointing that it seems audit reform will be dropped from the Queen’s Speech,” tweeted Michael Izza, chief executive of the Institute for Chartered Accountants of England and Wales. “ICAEW understands that there have been other priorities, but it seems that there’s always something more important.”

Lack of action 

Last month, the FRC published its three-year plan to wind down ahead of the ARGA entering force, but a fortnight later Kwarteng began to endure Labour pressure over the lack of action.

While a lot of work has gone on behind the scenes ahead of the transition, uncertainty is clouding the industry as to what shape the future holds, experts said.

“It is somewhat surprising, therefore, that the audit bill has been dropped from the Queen’s speech, particularly as the government said that audit reform was a priority,” said Steve Collings, partner at Leavitt Walmsley. “Seemingly it would appear it is not as much a priority as was otherwise thought. We’ll just have to wait and see what happens going forward but I suspect many people will be asking questions as to what is going on.”

The ARGA, backed by legislation, would be funded by a mandatory levy on industry, and given much stronger powers to enforce standards. 

‘Policy drift’

Beyond the headline items regarding the Big Four and the new regulator, other anticipated changes to be brought in by the new bill are also delayed, such as new reporting obligations around detecting and preventing fraud.

For the first time, auditors will also be able to go beyond a company’s financial results to look at wider performance, including against key climate targets. 

Many of the proposals were first drafted in 2018, but four years on they look no closer to becoming law. 

“This is policy drift,” said Simon Osborne, executive fellow at London Business School Leadership Institute. “The legislation is already overdue.”

Replies (4)

Please login or register to join the discussion.

Nefertiti
By Nefertiti
06th May 2022 10:28

The reason why the audit reforms were "dropped" from the list of bills to go before Parliament is quite simple and obvious. The corrupt major audit firms have lobbied (bribed) the ministers to drop it and as we know Her Majesty does not make any choices herself, she merely does as she is told.

Thanks (2)
Replying to Nefertiti:
avatar
By matthewleitch
06th May 2022 11:05

What about other priorities? The article above does not discuss this issue, but there were other legislative changes that did make it into the speech. Was there one item that was included that is really less important than the audit reforms? If so then it might have been a better use of parliamentary and civil service resources to work on the audit reforms rather than that other project. Otherwise, we may have to accept that a pandemic and now war have created extra work that bumps other things downwards on the 'to do' list.

Thanks (0)
avatar
By matthewleitch
06th May 2022 10:34

Please Mark Taylor, and other journalists writing for Accounting Web, present information in a rational and objective way. There are two major ways in which the above article fails to do this, in addition to generally emotional language. These two major points are:

1. The heading "Outrage as government signals audit reform on ice" is true but selective. Presumably there were also people who were relieved at the delay, and presumably other reactions too. The title could have been 'Reactions to the delay to audit reform', which is neutral and avoids giving a potentially misleading impression.

2. The discussion of legislative priorities repeated reasons why audit reform is seen as important by many people but did not outline the legislative changes that the government has decided are more important uses of the available time. If those other changes had been just mentioned then a fair minded reader would have had the opportunity to think about whether they agreed with the government's assessment of relative need. The article mentions more than once that the government had dropped the changes despite previously saying they were 'a priority'. But dropping changes that are 'a priority' is not in itself contradictory. Other changes were also priorities, but apparently higher priorities in the minds of the government as things currently stand.

Thanks (3)
avatar
By twohaporth
06th May 2022 11:34

The other side of this question is that in reality the problem with auditing is that it hasn't really moved with the times. It is now a box ticking exercise where auditors seek to prove that they have done their job so they cannot be blamed for missing something.
They are, after all, watchdogs not bloodhounds.
I'm sure times have changed since I last did 'big' audits but the attitudes then were on ticking off the rather more directed audit programmes that then existed. But then, as I assume is now the case, deviation from the programme was discouraged. We often found areas where suspicions were raised and, indeed, had been raised in previous years but they were generally brushed aside rather than investigated - after all you don't want to rock the boat!
It is a fact that there will always be Directors and Managers who for various reasons will 'adjust' the figures a bit here and there to show better results or hide their defalcations or excessive expenses and it isn't always easy to see it - well it wouldn't be would it?
Then, of course, there is the problem of 'it's a very large fee and we don't want to lose it' which inevitably colours the way in which the auditor looks at any problems - plus a bit of the old boys network I expect.
Quo vadis?
Well I think it is necessary that large audits are not done for more than two years before a change of auditor. This would, at least, allow a fresh set of eyes on the subject and remove some of the incentive to auditors to turn a blind eye to problems. Yes it would increase costs but the benefit would be better audits.
Secondly I think that in really big audits a 'wandering auditor' might be helpful. A person who has a brief to look at what catches his eye or his colleagues' eyes. It was Carillion's downfall that a new employee spotted enough to cause her to blow the whistle. We need more detailed involvement and less box-ticking.
No perfect answer - the obvious one would be a state audit agency but the state is so totally incompetent that that would never work in a million years.
Perhaps now the big firms have had to withdraw from Russia (involuntarily I suspect) they should have the spare staff to up their game a bit.
The other thing that surprises me (though not a lot) is why have ICAEW, ACCA and the like not dashed forward with plans to rectify the situation instead of making more money for themselves by fining the naughty firms? Surely this is primarily the reason they are there. Are there a lot of large firm representatives driving the Institutes? - he asked naively.

Thanks (2)