The winding down of the Financial Reporting Council cannot be allowed to halt progress

Few informed observers were surprised when the government’s ambitious package of corporate governance reforms, including a shake-up of the UK’s audit regime, was omitted from the King’s speech last November. Given that the marathon race towards the next general election has already begun in earnest, the long-trailed plans will almost certainly not be enacted during the current Parliament.

More delays likely

For the protracted lead up to that election – likely to be held in the autumn or winter of 2024 according to political pundits – the topic of audit reform has been shelved. Although it may be self-evident that this issue is very unlikely to move the hearts and minds of many swing voters, the importance of audit reform, including a re-invigorated regulator with powers to investigate and impose meaningful sanctions, means that we should see it back on the table soon after the last votes are counted.

But several media reports have suggested that Department for Business, Innovation and Skills officials privately indicate that the reforms are not a ‘political priority’. Given that a crowded parliamentary timetable will inevitably result from the formation of a new government, it would therefore be reasonable to deduce that we may well not see any reiteration of the current audit reform programme until 2027 at the earliest.

Adding weight to this suggestion, a recent press release from the Financial Reporting Council (FRC), setting out its priorities for 2024/5, made no reference to the Audit, Reporting and Governance Authority (ARGA) roll out.

However, another government press release on cutting red tape gives cause for hope.

Published last October, this release together with subsequent updates, does suggest that reform will still happen because a consensus on the idea exists on both sides of the political aisle, as evidenced by their respective public statements.

If the issue were once again kicked into the long grass by the Conservatives, should they emerge as electoral winners, sceptical commentators would inevitably point out that it simply continues an established pattern: government legislation to deliver the ARGA has been repeatedly delayed by six successive business secretaries over the past five years.

By contrast, the opposition Labour Party has already committed to passing the long-awaited legislation on audit and corporate governance reforms should it form the next government instead. In September 2023, shadow business secretary Jonathan Reynolds told the FT that Labour would deliver the required legislation to create the new ARGA regulator as a replacement for the FRC.

But broken promises from both sides of the political divide have often been made with remarkable regularity over time. To make sure that whichever party is next in government actually delivers on primary legislation enacting audit reform over the line this time, it is worth recalling why reform is so essential.

The need for reform

The Department for Business, Innovation and Skills originally conceived the overhaul to restore public trust in how big companies are managed and scrutinised. Following several high-profile corporate collapses and concerns over their audit quality – including BHS in 2016 and Carillion in 2018 – the government wanted to legislate to ensure that the UK’s largest corporate entities are governed responsibly.

This followed the recommendations from three independent reviews – by Sir John Kingman in 2018, by the Competition and Markets Authority (CMA) in April 2019, and by Sir Donald Brydon in December 2019. CMA Chairman Andrew Tyrie noted in his review: ‘The Government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only 4 firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.’

Five years since that robust critique and we are no further forward in resolving the inadequacies of the present regulatory system. This glacial progress has been blamed on government ineptitude, the lobbying power of the Big Four accountancy firms and naked political expediency. But it will remain just as important to get it through after the election – when parliamentary time allows, of course.

Further delay inevitably carries the risk that another BHS or Carillion will emerge on the horizon with the associated costs in people’s jobs and livelihoods and the inevitable political fallout. Next time parliamentary time allows, progress must not be halted, or the process delayed again.

Paul Brehony is a partner at Signature Litigation
signaturelitigation.com