RoadMap
How audit reform has lost its way
Carillion’s collapse in 2018 was the trigger for the government to move to replace the UK’s independent regulator of corporate governance, financial reporting, audit and the actuarial profession, the Financial Reporting Council (FRC.) A new Audit, Reporting and Governance Authority (ARGA) would be created. So what is the state of play, five years on?
Carillion collapse provides impetus
Carillion is one of the great modern corporate disasters. At the time of its collapse, it held just £29m in reserve and had a debt pile totalling around £5bn. It had 18,000 UK employees on its payroll, and 43,000 worldwide. MPs in the Work and Pensions and BEIS committees said in a joint report at the time that the company was using its suppliers as a “line of credit” to shore up its balance sheet. It called on the government to carry out “ambitious and wide-ranging reforms” in response, including to the regulation of audit, corporate governance and financial reporting.
Kingman review sets new path
Sir John Kingman’s review of the FRC was the first time a replacement body with statutory backing was recommended. He found the FRC to be “a rather ramshackle house, cobbled together with all sorts of extensions over time” and highlighted its lack of a strong statutory foundation and limited powers. The review recommended the creation of a new regulator with a clearer sense of purpose and stronger powers, something the government officially adopted in March 2019. However, since then, the primary legislation required has been delayed.
FRC publishes transition plan
Meanwhile, the FRC has undertaken extensive reform as it prepares to transition to ARGA. In April 2022, it published a three-year plan for achieving its conversion to the new regulator, including:
• increasing headcount by 16.5%;
• resources for regulatory standards by 25%; and
• resources for enforcement by 13%.
In addition, the FRC set out a series of key areas in which it intends to achieve “regulation in the public interest”:
• setting high standards and assessing their effectiveness;
• promoting improvements; influencing international standards;
• promoting a more resilient audit market through greater competition; and
• transforming into a “robust, independent, high-performing” regulator.
Still no legislation
Rather than giving ARGA statutory backing, the waters were muddied in October last year, when the government announced the withdrawal of draft legislation around non-financial reporting requirements, after concerns were raised over the potential burden on companies. That announcement was followed by an about-turn by the FRC itself, when, in November, it announced it would drop more than half of its proposed reforms to the UK Corporate Governance Code. A draft bill on ARGA was expected in the 2022/23 parliamentary session, but did not appear and was absent from the King’s Speech on 7 November 2023. Business minister Kevin Hollinrake, however, insisted the government remains committed to ARGA, adding “we will bring forward legislation to deliver these reforms when Parliamentary time allows”.
