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