UK audit reform: Ambivalence in the boardroomby
The government’s audit reforms are coming and businesses need to get ready. Better technology will help them do that, urges Galvanize CEO Keith Fenner.
Audit reform is coming. In spite of widespread resistance from the supposed beneficiaries in second-tier audit firms and sharp criticisms from senior figures including Financial Reporting Council chairman Sir Jon Thomson, the Department for Business, Energy & Industrial Strategy (BEIS) will conclude its 16-week consultation into audit reform on 8 July and look to draft legislation to implement the changes.
Many commentators, me included, have characterised the proposed reforms as the UK equivalent of the US Sarbanes-Oxley Act (SOX) that was introduced in the wake of the Enron scandal at the turn of the century.
As with the US prototype, many people have wondered how it will affect the Big Four. In the end the big audit firms did pretty well out of the crackdown on audit independence. But what are the issues for UK finance leaders and how well prepared are for this reform?
To answer these questions we asked global research company Censuswide to survey 250 senior finance managers in UK-listed companies. The survey findings
Came up with some interesting insights into the expected impacts on corporate health and trust in business:
- 69% of respondents said audit reform would positively affect the UK’s economic recovery
- 43% expected audit reform to trigger more corporate failures; 27% though it would lead to fewer corporate failures
- 42% expected investor confidence in UK-listed companies to increase (30% thought it would decrease)
- 43% predicted public trust and confidence in business would increase, while 23% anticipated a fall.
The government’s rationale for introducing the reforms was to hold negligent directors and auditors to account for corporate failures, and to ensure that when it finally arrives, the new Audit, Governance and Regulatory Authority (ARGA) will be fully equipped to punish serious lapses.
The vast majority of survey respondents agreed with the need for tougher enforcement: 80% said directors should be held personally responsible and liable for the accuracy of company financial statements.
Warnings have emerged from within the accounting and audit professions that the more onerous regulatory environment would result in an accountancy talent drain. Of course dishonest executives and negligent auditors should be held accountable, but there needs to be some balance as the circumstances are not always in their control.
Optimism for improvements
Financial professionals feel like their day-to-day work will benefit from some SOX-like reform. Two-thirds recognised that their existing internal control systems could be improved to comply with a UK version of SOX, leading to better resilience and risk management. On the other side of the balance, however, 85% said their organisation would need investment to make the necessary changes, which could take more than two years to implement.
Whether these reforms will provoke or prevent company failures and enhance the UK’s reputation as place to do business, the sentiments among finance leaders was mixed.
Surprisingly, only 27% of finance professionals surveyed thought the audit reforms would have any real impact on preventing corporate failures; 43% thought the opposite.
As a prediction of whether the government will achieve its aims, or the fuel an unintended increase in malfeasance as more scandals are rooted out, the survey data heightens the sense of ambivalence and unpredictability at large in the wider market.
Calls for delay
There was a stronger sense of unanimity on the reform timetable. Despite the appetite for reform and the perceived preparedness among respondents, over two-thirds still wanted UK SOX to be delayed – by an average of two years. The technology gap needed to implement the reforms was a factor, but regulatory dithering should not hold finance leaders back from making investments that will improve how their businesses perform. Organisations that invest now in technology will enjoy the benefits of strong controls, better risk visibility and better overall performance even before UK SOX becomes part of the corporate governance landscape.