Audit groups and investors have warned the government that scaling back long-awaited corporate governance and audit reforms could lead to more corporate scandals, according to reports.
In a letter to business secretary Kwasi Kwarteng, the chief executive of the Chartered Institute of Internal Auditors, John Wood, said stronger regulation of internal controls were fundamental to any effective audit and governance reform programme.
“Whether it is BHS, Carillion or Patisserie Valerie, the significant costs associated with corporate collapses linked to job losses, audit and corporate governance deficiencies cannot be overstated,” he added.
The news comes amid increasing concerns that the government may scale back the audit reform package, which has previously been touted as the biggest overhaul to British audits and corporate governance in generations, following reports in the Financial Times last week.
The audit reform plans, which are currently being finalised, were prompted by a series of high-profile corporate scandals and collapses including retailer BHS and Carillion.
One proposal pegged to be dropped, following backlash by businesses, is that based on the US Sarbanes-Oxley Act, which uses legislation to force directors to sign off on businesses’ internal controls for financial reporting.
Earlier this year it was reported that the new reforms could see directors facing fines, suspensions or even having to return their bonuses in the event of a company collapse or serious director failings.
But now a limited version of the rule, which would also be harder to enforce, is expected instead.
In his letter to Kwarteng, Wood said legislating on internal company control requirements was “entirely appropriate”.
“This would underline its importance and ensure it cannot be evaded.”
The alternative, of putting the measure in the corporate code, which is complied with on a ‘comply or explain basis’, “would not carry the same weight, opening up the possibility of evasion and make it more difficult for the audit regulator to enforce,” he warned.
Without legislation binding them, directors will be let off the hook from taking more responsibility for company accounts.
The pared-back version of the rule would also only apply to companies with a premium listing, leaving privately-owned firms free to ignore the guidance.
For accounting firms, who have been at the receiving end of much criticism over failures to raise the alarm before corporate scandals, the move puts more of the onus on auditors.