The government has announced it will not proceed with the Audit and Corporate Governance Reform Bill, which has been called for since the collapse of Carillion eight years ago.
The Bill was first raised following concerns that auditors failed to spot problems ahead of the failure of Carillion and other high profile corporate collapses which left former workers and suppliers financially ruined.
Potential legislation has been discussed many times but has never been passed. The new Labour government said it would introduce the rules in the King’s Speech in July 2024.
Among the plans were shutting the Financial Reporting Council (FRC) and replacing it with the beefed-up Audit, Reporting and Governance Authority, which would have had stronger powers.
But the government has now said it is scrapping the Bill to “avoid significant new costs for large firms”.
In a letter to Business and Trade Committee chair Liam Bryne, small business and economic transformation minister Blair McDougall said “our priority is to promote economic growth and reduce administrative burdens” but some of the reforms will “increase costs on business”.
He added that the government will instead focus on the “simplification and modernisation of corporate reporting” and “will launch an ambitious consultation this year to co-design these changes with companies and investors”.
McDougall also said “the need for major reform is less pressing than it was” because “a great deal of progress has been made since the collapse of Carillion in 2018” with “considerable improvement in the quality of audit regulation, and of audit itself”.
He concluded: “It remains important to have effective, proportionate regulation of audit
and a regulator that has the right legislative set-up to do the job. We will still look to put
the Financial Reporting Council on a proper statutory footing, as soon as parliamentary time allows.”
Reacting to the news, Caroline Escott, chair of the Governance for Growth Investor Campaign (GGIC), said:
“Eight years after Carillion’s collapse and only a few months after audit and controls issues wiped off almost £600m of shareholder value in one day at WH Smith, we’re disappointed that these necessary and important audit reform measures have been shelved.
“High-quality audits and sensible corporate governance standards are vital for healthy capital markets and act as a foundation for growth, confidence, and resilience in the UK economy. Although the modernisation of corporate reporting initiative is to be welcomed, streamlining corporate disclosure is no substitute for implementing sensible and widely welcomed measures on PIE status, director accountability and audit market oversight that would have helped protect people’s savings.
“We urge the government to reconsider its decision. Good governance is fundamental to the UK’s economic growth, and high audit standards enable the high-quality audit that supports value creation in the interests of companies, investors, and everyday UK savers alike.”
Alan Vallance, chief executive of the Instutite of Chartered Accountants in England and Wales, said:
“We cannot hide our disappointment that after many false dawns, the government has decided to scrap the Audit and Corporate Governance Bill. The government had itself recognised that an Audit Reform Bill would increase global investor confidence in UK companies and increase the prospects of growth.”
“Nevertheless, with the changes the profession has made, audit quality and firm governance and resilience are in a very different and vastly improved place from where they were in 2018.
“The final piece in the puzzle is to give the FRC as regulator all the tools it needs to carry out its job. We offer to continue to work with the government, the Financial Reporting Council and firms to ensure these specific powers are granted and that the UK is the best place in the world to attract global investment.”
Gail Boag, ICAS CEO, said:
“This morning’s announcement that the UK Audit and Corporate Governance Reform Bill has been scrapped is deeply frustrating. The whole accountancy sector and even governments themselves have agreed for years on the need for audit and corporate governance reform.
“There was recognition that better corporate governance could not only support investor confidence and therefore business growth, but also that more must be done to protect the wider impacts of corporate collapse on the public. Failures such as Carillion, BHS, Patisserie Valerie and others saw job losses and pensions massively reduced in value, demonstrating why this bill is much needed.
“There is no doubt that recent improvements and work across the sector and by the FRC have moved us on from where we were, and that the quality of audit and of corporate governance has improved. However, the issue of director accountability remains far from resolved, andthere is an urgent need to clarify the scope of the FRC’s role and powers.
“Through our advocacy and regulatory work, we will continue our efforts to increase business confidence and growth, whilst also protecting consumers and the public.”