It was barely two weeks after Carillion’s 2018 collapse that the head of the accountancy watchdog — a body accused of being “useless” and “toothless” — called for an overhaul of the audit market.
There was plenty of blame to go around. The construction company’s demise had left tens of thousands of staff facing redundancy, plunged hundreds of small suppliers and outsourced government projects into chaos, and dumped pensioners into the sector’s safety net.
The issue was how auditor KPMG had signed off on the company’s accounts four months before Carillion wrote its contracts down by £845mn and issued the first of a series of profit warnings. And what, following the harm caused by other corporate failures such as BHS, needed to change?
The answer — four years, three reviews and one mammoth consultation later — is apparently not much as far as the government is concerned. Or at least not with any urgency.
A year after it kicked off the long-awaited process of audit and corporate governance reform, the subject appears likely to be dropped from the Queen’s Speech next month.
That would be embarrassing for Kwasi Kwarteng, the business secretary, who, to his credit, appreciates the subject’s importance and made it an early priority. And it would be a short-sighted mistake.
The official explanation for shelving the wide-ranging reforms is simple: priorities. The war in Ukraine has pushed energy security and dirty money (hardly new issues either) to the top of the agenda.
It does not quite ring true. The likely package had already been filleted by those playing on government concerns about burdens on business or an unconservative proliferation of rules. A UK equivalent of Sarbanes-Oxley, making directors responsible for internal controls over financial reporting, looked set to be one victim, despite substantial support from investor groups and audit firms, and its success in the notoriously overregulated, overburdened US market.
It would be unfortunate to miss an opportunity for genuinely radical reform. But it seems unforgivable to fail to fix the basics of how the audit market is overseen, points that are well-understood and uncontroversial.
John Kingman, in his 2018 report, was clear: the audit regulator, the Financial Reporting Council, was not fit for purpose — and its problems were in part down to the “limited hand it [had] been dealt by successive governments”. It lacked a meaningful statutory base; its powers were “clearly deficient”; its funding through voluntary levy was “seriously inappropriate”.
His prescription was to create a new body, with more powers and a broader remit, that was no longer required to regulate by negotiation with the regulated.
The FRC, under chief executive Jon Thompson, has seriously overhauled its culture and approach, taking a more robust line with industry. Its latest review of audit quality found that nearly 30 per cent fell below an acceptable standard.
But acting on the outstanding recommendations made by Kingman, nearly half the total, requires the government to legislate. Instead, the government may opt to put the infrastructure bank on a statutory footing and create a new football regulator, while leaving oversight of audit and corporate reporting in an unacceptable state.
Possible changes included adding competition to the regulator’s mandate, in a market where the Big Four firms still have an iron grip on the audit of large listed companies, and expanding oversight and the expectation of higher standards to big private companies, such as Liberty Steel, Bulb or P&O. But they also included basic powers such as the ability to commission a so-called skilled person review in cases of concern, or the ability to take enforcement action against directors.
This reform package was always wrongly badged as a way to stop corporate failures. That is impossible. But improving oversight, standards, governance and disclosure — while unlikely to feature in a political campaign leaflet — should help to anticipate, mitigate and manage the widespread harm caused by uncontrolled and unexpected collapses.
It is only a matter of time before the next major failure sets off another round of angst. Except, this time, we will already know a good deal of what the answer should be. Now, if only someone could find the time to do it.