Chartered IAA: Why audit reform is a no-brainer

More than eight years have passed since the ruinous collapse of construction giant Carillion, and in all that time, not a single piece of legislation has been passed to ensure that audit and corporate governance laws are fit for purpose. It is all the more disappointing and concerning that the Audit Reform and Corporate Governance Reform Bill has now been scrapped. This is a short-sighted decision that may well come back to haunt the government, writes Gavin Hayes, head of policy and public affairs at the Chartered Institute of Internal Auditors (Chartered IAA)

Table of Contents

Access deeper industry intelligence

Experience unmatched clarity with a single platform that combines unique data, AI, and human expertise.

Find out more

Sadly, the Carillion scandal has proved far from an isolated incident. In the years since the firm’s collapse, we have witnessed a series of further avoidable corporate failures linked to weaknesses in audit and governance.

Whether it be Bulb, ISG, Patisserie Valerie, P&O Ferries, Thomas Cook, Wilko or, last but not least, Wirecard, each of these collapses has, in varying degrees, underscored vulnerabilities in the very system designed to prevent such failures. Despite their size and significance, many of these companies did not even have an internal audit function in place. In addition, research by the Audit Reform Lab has revealed that in three-quarters of major UK corporate collapses since 2010, the external auditors failed to raise the alarm in time.

These failures have had a devastating impact on people’s jobs, on the value of employees’ pensions, and on smaller businesses in the supply chain, and have contributed to further store closures on our already struggling high streets. They have also caused significant damage to public trust and confidence in audit, governance and business more broadly. Britain’s global reputation for high audit and governance standards has been tarnished, undermining the confidence of international investors. The UK no longer looks like the safe investment environment and choice it once did.

Given this context, and the fact that this is the polar opposite of the economic growth we have been promised, audit reform should clearly be seen as pro-jobs, pro-growth and pro-investment. It is not about burdening businesses; it is about supporting them to take risks responsibly and ensuring greater accountability when things go wrong.

Then there are the tens of millions of pounds of taxpayers’ money that the Department for Business and Trade can now, quite frankly, be seen to have wasted on various independent reviews into audit, successive public consultations, the production of a White Paper and further rounds of consultation. Added to that is the considerable civil service time spent working on the draft bill and related proposals, as well as the effort invested in preparing the previous statutory instrument that would have amended the Companies Act 2006, which was pulled by the last Government at the final hurdle.

Eight years have been spent on this process, only for it to result in zero legislation. It is a shocking and flagrant waste of public money, on top of the losses associated with the schools, hospitals, prisons and many other public sector projects that have been left stalled or incomplete due to the collapse of Carillion and, more recently, ISG.

Cross-party support

The Audit Reform and Corporate Governance Bill proposed common-sense measures that enjoyed strong cross-party support. As one current government minister put it to me at a dinner with chief audit executives shortly before the general election: “Audit reform is a no-brainer!” I could not agree more.

Sensible measures included putting the Financial Reporting Council on a statutory footing with the legal powers it needs to do its job properly – most importantly, the power to sanction all company directors, not only those who happen to be chartered accountants. The bill also proposed widening the definition of a public interest entity to include the very largest private companies, so they would be subject to tighter audit and governance requirements. Given that several recent avoidable failures involved large private companies such as ISG and Bulb, this is still essential. It is both baffling and ridiculous that while Tesco and Sainsbury’s are classed as public interest entities, Asda is not, simply because of its ownership structure. Without addressing this, I fear more firms will inevitably fall through the cracks and fail with devastating consequences for jobs and growth.

Despite dropping the bill, the government says it remains committed to putting the Financial Reporting Council on a statutory footing but has offered no timetable and only the tired excuse that it will happen “when parliamentary time allows”. Similarly, it claims to remain committed to modernising the corporate reporting framework, yet there is no sign of concrete proposals. It would be wise for ministers to make progress quickly.

For without meaningful reform, it now feels less a question of if we will see the next major corporate scandal, and more a question of when. When it comes, it will inevitably reignite public and political pressure for change, pressure that could have been avoided had the government stuck to its guns and followed through on its commitment. The calls for reform to fix our broken audit and corporate governance system will not be going away anytime soon.

Frequently asked questions

What’s the issue with scrapping the Audit Reform and Corporate Governance Reform bill?

Each corporate collapses has, in varying degrees, underscored vulnerabilities in the very system designed to prevent such failures. Despite their size and significance, many of these companies did not even have an internal audit function in place.