In late May, the government gave more detail on how it plans to reform big corporate audits. Inappropriate audits have contributed to several significant corporate failures – including that of the late construction giant Carillion in 2018. The government has acknowledged this, producing a report which has since been the focus of a consultation.
The government’s response to this consultation is now being criticised and described as a significant “watering-down” of the initial proposals.
How true is this? In many respects ministers have to attempt to strike a delicate balance. They must encourage businesses to operate in the UK, making it an attractive place to invest in, but also stamp down on rogue businesses which invariably rely on government bailouts only to collapse – causing hundreds of job losses and serious damage. Carillion’s collapse, as well as that of BHS, fuelled these proposals for reform. Our politicians need to be seen to be taking these issues seriously for fear of negative PR.
But is this approach all part of the trend we have seen over recent years? We should ask ourselves how much regulation we want. Is the government merely window dressing these proposed reforms while not having the resources to be able to tackle them?
At a glance, it seems highly likely that history is repeating itself. We have seen this approach before – with the underused and extremely costly Unexplained Wealth Orders or the Economic Crime Bill which has faced a long series of delays in being implemented. This audit reform saga is nothing new, and may well be similarly unimpactful.
The original strategy had proposed that all private companies with more than 500 employees and a turnover of more than £500m be classed as ‘Public Interest Entities’ (“PIEs”) – effectively a company that is too big or too critical to fail. Currently, only listed companies and financial institutions are classified as PIEs. The proposal would have amounted to significantly more companies being subject to enhanced disclosures requirements and falling under the remit of the audit regulator.
The government now proposes only to capture 750-strong workforces and companies with a turnover of more than £750m. Several hundred organisations that would have been captured by the new rules now won’t be. The proposals still require directors to report on actions they have taken to prevent and detect fraud, but many measures have now been dropped. For instance, auditors were also going to have to provide a formal assurance on the company’s internal controls and fraud-prevention measures. But that is no longer the case.
PIEs are due to come under the supervision of the new Audit, Reporting and Governance Authority (ARGA) in place of the Financial Reporting Council. However, ministers have been slow to ensure legislation is in place to set up the new Authority or to give it the statutory powers necessary to succeed. There is talk of “careful consideration to the appropriate lead times” for the new reporting requirements. In other words, it is likely that the reforms will progress at a snail’s pace.
So where does this leave us? Many are questioning whether there is any real interest from the government in imposing tougher accounting requirements and corporate reporting on the private sector.
At first blush, the government’s commitment to reform in this area looks weak. It may indeed be a while before we see audit reform that will make a real and lasting change.