U.K. Faces Criticism as Government Backtracks on Audit and Corporate Governance Reforms

The United Kingdom's plans for comprehensive audit and corporate governance reforms have encountered a setback, drawing criticism from industry experts and officials. The absence of primary legislation for the proposed reforms raises concerns about the government's ability to respond effectively to future corporate crises, according to a statement released by the Institute of Chartered Accountants in England and Wales (ICAEW).

The ICAEW expressed worry that the government's inertia on implementing audit reforms could lead to inadequate rules, an underpowered regulator, and diminished capacity to prevent the recurrence of events similar to the collapse of Carillion nearly six years ago. The promised bill on audit and corporate governance, which was expected to bring about substantial legislative and regulatory changes, was not included in the King's Speech, signaling a significant delay in its implementation.

The proposed reforms included the establishment of a new regulator, the Audit, Reporting, and Governance Authority, on a statutory footing. Without primary legislation for these reforms, the ICAEW argues that the effectiveness of the existing Financial Reporting Council (FRC) in overseeing company directors will be compromised.

Despite significant improvements made by both the regulator and the accounting profession in response to the collapse of Carillion, the government's commitment to comprehensive reform remains unfulfilled. The ICAEW highlighted that the lack of progress is evident, even after three independent reviews, numerous public consultations, and various policy announcements.

Recently, draft reporting regulations, which included requirements for companies to produce a new strategic report, a resilience statement, and a directors' report containing an audit and assurance policy statement, were abruptly scrapped by the Department for Business and Trade (DBT), citing them as 'burdensome.'

The launch of a government consultation on Smarter Regulation has further fueled speculation that the retreat from audit and corporate governance reform is a deliberate decision by DBT to reduce, rather than enhance, regulation.

ICAEW Chief Executive Michael Izza expressed frustration at the government's lack of ambition on audit reform. He raised concerns that the absence of progress could lead to future corporate collapses, stating, "We won't be able to handle the next Carillion-like event any better than we did the last one."

Without primary legislation, the FRC cannot take on a more significant role in policing directors or introduce measures to increase competition in the audit market, such as the proposed implementation of managed shared audits for UK-registered FTSE 350 companies.

The ICAEW has consistently warned that momentum on audit reform is in danger of being lost, emphasizing its vital role in maintaining investor confidence. The organization stressed the need for reform to focus on restoring public trust in the profession and ensuring it evolves to address the needs of wider society.

Despite recent cross-party political support for audit reform, with MPs and peers urging the government to include the Audit Reform Bill in the King's Speech, the lack of tangible progress raises concerns about the future resilience of the UK's corporate governance framework. The ICAEW calls for urgent action to prevent further delays and reinforce the audit and corporate governance framework for the greater public interest.

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