Audit reform bill has been dropped: What happens next?

Why did we want an audit reform bill?

Carillion was the UK’s second-largest construction company, with 43,000 employees. In March 2017, it reported annual sales of £5.2bn and its share value hit close to £1bn.

A year later, it had gone bust – leaving 30,000 unpaid subcontractors, £1bn of debt and a £0.5bn pension deficit.  It was one of several high-profile corporate failures that started a conversation about corporate governance and audit oversight.

This led to four major reviews by Sir John Kingsman, the CMA, the BEIS Select Committee and Sir Donald Brydon.

The reviews made ambitious recommendations. These included proposals for joint audits and for the Big 4 to completely separate their audit divisions from other services. Some were shot down, while others persisted; but no legal changes were made.

Then in 2024, Labour’s first king’s speech promised an audit reform bill, which would:

• Replace the Financial Reporting Council (FRC) with a new Audit, Reporting and Governance Authority (ARGA)
• Expand its remit to large private companies as well as listed ones
• Give it the powers to investigate and sanction company directors as well as auditors

On Tuesday 20 January, the department for business and trade announced these plans would no longer go ahead.

The government’s letter says this is for three main reasons:

1. The government wants to achieve growth by removing regulation, not adding it
2. Auditors and the FRC have made many improvements since 2019
3. Parliament’s schedule is limited and this doesn’t make the cut.

All these are true, but many will be disappointed that little has come from the good intentions and careful reviews that followed Carillion.

Has anything actually been done?

Quite a lot has happened since Carillion. The FRC was keen to show it could ‘become’ the new regulator rather than being ‘replaced’ by it – and has pushed accounting bodies and firms to make improvements.

The auditing standard on going concern was revised in 2019 with pages of UK-specific amendments. These require auditors to apply more scrutiny to management’s assessment and disclosure about companies’ future. The FRC followed this with guidance on going concern for small companies and other companies.

The FRC’s ethical standard for auditors was substantially rewritten in 2019 and further developed since. One result has been a reduction in non‑audit services provided by listed company auditors. The FRC also leant on the Big 4 to create more operational separation between the audit and non-audit parts of their business.

Meanwhile the FRC has been more robust both in its own audit quality reviews (for audits of public interest entities, mostly listed) and also in its expectations of the ICAEW, ACCA and ICAS who monitor other audits.

Although much of this started with the FRC, the improvements required have ultimately come from company finance teams – challenged by their auditors and supported by the accounting bodies.

Is anything lost by dropping the audit reform bill?

In our view, yes.

After high-profile corporate collapses, it’s fair to ask why the auditors didn’t see the accounts were too optimistic (or needed impairment). It’s also fair to ask why the directors prepared optimistic accounts in the first place.

Giving the regulator the power to investigate the CEO and directors of high-profile collapses at the same time as their auditors, would have been a balanced move and is now unlikely to happen.

Additionally, the bill was meant to rebalance regulation towards the largest private companies and away from the smallest listed ones – who might have welcomed the change. Larger AIM businesses and smaller building societies had hoped to be scoped out, so they will be sad to see the bill go.

And, finally, when it comes to corporate failures, it is arguably better to fix the roof while the sun is shining, than to wait for it to leak and say “oh dear.” In this case it looks like we are on the second track.

What happens next?

The good news is we can stop second-guessing what might happen.

With the bill dropped, we are unlikely to see major legislation reforms in this parliament. If we want to improve how accounts are prepared and challenged, it’s on us – major accounting firms, accounting bodies, the FRC and ultimately finance teams – to make those changes.

We will be interested to see what the FRC has to say about the bill being dropped. This will likely appear on their news page.

Collectively, though: the ball is in our court.

For PKF Francis Clark that means continuing to invest in our internal audit quality and accounting knowledge. It also means supporting finance teams to get their accounts right in the first place.

We are proud of our contribution to the South West accounting community, whether that’s through our formal engagements for accounting advice and audit challenge, or outreach like our finance direcotor seminars, website articles and mailshots – or simply catching up with a business owner for coffee and asking “how’s business”.

The change in revenue and lease rules (starting this month) is a perfect example of where we can help.