Tough new corporate audit reforms designed to prevent another high profile company collapse like retailer BHS or contractor Carillion will be introduced by the government – although the draft measures are likely to be delayed for a further two years.
The UK-wide legislation has been long delayed and was controversially omitted from the King’s Speech last year.
The draft Audit Reform and Corporate Governance Bill will pave the way for a new accounting regulator – the Audit, Reporting and Governance Authority (ARGA) – to replace the existing Financial Reporting Council (FRC).
The government said the watchdog will be given greater powers to tackle bad financial reporting and help build trust in British firms. The number of firms likely to face tougher audit requirement is set to increase as well as curb potential conflicts of interest within audit firms which also earn millions by carrying out consultancy work for the same companies.
Richard Moriarty, FRC chief executive, welcomed the move saying it would ‘modernise its powers and strengthen the transparency and integrity of the UK’s corporate governance, financial reporting and audit’.
It would provide investors, employees and consumers with greater confidence in the health of UK companies he said.
He said the FRC had transformed “into a more robust and effective regulator” he said. “Despite this progress, there are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need.
“Without these changes we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.”
If it passes into law the measures will look to prevent the repeat of disastrous corporate failures, such as BHS, which led to the loss of 11,000 jobs in 2016 and sudden collapse of construction group Carillion, which left 30,000 subcontractors unpaid in 2018.
It will also see all directors of the UK’s most significant companies face sanctions if they fail in their financial reporting duties. Currently directors making incorrect financial statements can only be held to account by the regulator if they are members of an accountancy body.
Gavin Hayes, at the Chartered Institute of Internal Auditors said: “We are delighted that the Government has committed to a draft Audit Reform and Corporate Governance Bill in the King’s Speech. Ensuring the audit regulator has the legal powers it needs to do its job effectively is vital to restore trust in the audit and corporate governance system which underpins our economic stability.”
Adam Leaver, professor of Accounting at Sheffield University, and a member of the Audit Reform Lab, said: “It’s great news the new government has made audit reform a central part of their plans for economic stability and growth.
“When auditors fail and firms like Carillion, Thomas Cook and BHS go bust, it’s ordinary people that pay the price – through expensive government bailouts, job losses, and costly disruption right across the supply chain.”
“The audit industry is plagued by poor standards, a toothless regulator, conflicts of interests and weak sanctions for malpractice. Our research found that auditors failed to raise the alarm for three quarters of British companies that went bust in the last decade.”
Alan Vallance, of the Institute of Chartered Accountants in England and Wales, said: “Reliable, trusted reporting by companies is fundamental to investor confidence which in turn is key to economic growth and stability. This long-awaited reform will not only reduce the risk of disorderly business failure but will contribute to the transition to net zero.”