The one year anniversary of the UK government’s “once in a generation” proposals to overhaul audit and corporate governance is yet another marker of the slow pace of reform, industry participants have said.
“While we fully understand and appreciate that the government has been grappling with a myriad of critical issues [..], the issue of audit reform does not sit in a silo,” said the Chartered Institute of Internal Auditors (CIIA) in a letter addressed to the Prime Minister on Monday.
The letter cited coronavirus, the energy crisis, and the ongoing conflict in Ukraine as valid mitigation for the delay, but went on to argue these issues further highlight the need for reform.
“We would argue that because of these crises, it makes audit and corporate governance reform even more vital to supporting the long-term success of businesses and the wider economy, helping to protect jobs, pensions and livelihoods,” it stated.
First unveiled by the Department for Business, Energy and Industrial Strategy (BEIS) on March 18, 2021 in the form of a 200-page whitepaper, the proposals outlined the intention to reduce the dominance of the ‘Big Four’ accountancy firms (Deloitte, Ernst & Young, KPMG and PwC) while also making directors of the UK’s biggest companies more accountable.
As outlined in the whitepaper, such measures included the introduction of “managed shared audit”, which would require UK-registered FTSE 350 companies audited by a Big Four firm to hand a portion of the work to a “challenger” firm.
Other key areas included the creation of a new regulatory body for audit – the Audit, Reporting and Governance Authority (ARGA) – and a series of internal control reporting requirements akin to the US’ Sarbanes-Oxley system.
“We care about this issue because we want to see our businesses succeed and for the UK to maintain its enviable reputation for good corporate governance,” the CIIA’s letter continued.
“In an increasingly uncertain and economically volatile world, the need for audit reform is now more urgent than ever, as businesses face the headwinds of geo-economic and financial challenges.”
This was echoed by John Boulton, director of policy at the Institute for Chartered Accountants in England and Wales. The business climate is becoming increasingly difficult at present, he said in an email.
“While we understand the government has had other priorities, the slow pace of audit reform is frustrating.”
Boulton noted growing inflation and questions around energy security will make doing business “more difficult”, something the new regulator will need to respond to.
“In the face of such problems, it’s ever more important that there are effective measures for the entities that are most in the public interest – key to this are new and robust measures to ensure director accountability for the effectiveness of internal control – and we hope the government will act decisively and rapidly to give ARGA these powers,” he said.
The nature of the proposals themselves has also sparked concern across the industry in recent months. For instance, in November 2021, plans for the managed shared audit system were labelled “insufficient” by the ICAEW, claiming that this could “adversely” impact audit quality.
Furthermore, a report released in June 2021 found 68 percent of senior finance professionals from UK-listed firms believed the reforms should be delayed due to the financial and logistical strain it would place on their organisations.