Reform is an “urgent priority”, says accountancy body chief
The accounting industry is urging the government to prioritise reform of the sector following the appointment of Kwasi Kwarteng as business secretary.
Michael Izza, chief executive of the Institute of Chartered Accountants in England and Wales (ICAEW), said Kwarteng needed to make reform of corporate governance and audit an “urgent priority”.
“This is a key part of ensuring that Britain is the best place in the world to do business, and it is now seriously overdue,” he said.
Auditors have repeatedly failed to warn investors about looming problems, with the big four accountancy firms – PwC, KPMG, EY and Deloitte – often finding themselves in the firing line.
A number of high-profile collapses, including retailer BHS and construction company Carillion, have prompted three independent reviews in recent years, all of which have recommended an overhaul of British auditing.
According to the Financial Reporting Council (FRC), a third of audits carried out by the UK’s main accounting firms failed to meet quality thresholds.
Sir John Kingman’s review of the FRC, the Competition and Markets Authority’s (CMA) market study of statutory audit services, and Sir Donald Brydon’s review into the quality and effectiveness of audit, together put forward 157 remedies and recommendations for change in the audit sector.
However, despite the reviews and calls for reform, the government has yet to publish its promised consultation on audit reform and wider aspects of corporate governance. The government said in December 2019 that it would legislate to create a “strong regulator” with the necessary powers to reform the sector but did not set a timetable.
Kingman’s 2018 review of the FRC was scathing, calling for it to be replaced with a new independent regulator called the Audit, Reporting and Governance Authority to help restore trust in the scandal-hit audit market.
The CMA’s report, released in April last year, called for separation of the audit and consulting arms at the big four accounting firms because of potential conflicts of interest.
Former London Stock Exchange chairman Brydon warned in his review that weak governance could potentially lead to bad accounting outcomes. He recommended that there needed to be more involvement from company shareholders and increased transparency around the audit process.
The consulting fees received by audit firms often outweigh those of the audit. Critics argue that, as a result, the big four auditing companies are less demanding in their audit questions as they want to preserve their consulting fees.
Kwasi Kwarteng replaces Alok Sharma as secretary of state at the Department of Business, Energy and Industrial Strategy. Sharma has left to concentrate full time on preparations for November’s UN COP26 climate conference in Glasgow.
“It is good to see that Alok Sharma will now do the job of COP26 president on a full-time basis. This is a role of global importance and it is crucial that the UK makes a success of it,” the ICAEW’s Izza added.
Last Updated: 14 January 2021