The wait for the “long-awaited” government bill to reform the audit market is over. It is not because ministers have decided it’s embarrassing that eight years have passed since the collapse of Carillion, the massive corporate failure that reminded everybody that auditing is boring until it matters greatly that outsiders can trust the published numbers. Rather, it is because the government has given up on a reform bill. It would rather give another airing of its “pro-growth” refrain.
“While the planned reforms would be beneficial, some would increase costs on business, and it would not be right to prioritise these over more deregulatory measures,” the minister for small business, Blair McDougall, formally told the business select committee. He had other explanations – not enough parliamentary time and “the need for major reform is less pressing than it was” – but all can be regarded as a case of short memory syndrome.
Back in 2018, the chaotic collapse of Carillion, one of the country’s biggest construction and contracting firms, prompted near-universal agreement that the quality of audit in the UK, and audit regulation, was overdue for a major upgrade.
Almost 3,000 employees lost their jobs and, since the company was up to its neck in contracts to service schools and hospitals, the government had to spend £150m to maintain basic services. The shocking detail was that it took just six months from Carillion’s first profits warning to full calamity. At the end, liabilities were about £7bn and cash just £29m.
KMPG, as auditor, copped a record fine from the audit watchdog, the Financial Reporting Council (FRC), and the fallout continues, with two ex-Carillion directors being fined by the Financial Conduct Authority as recently as this month. But, back in 2018 the whole saga was viewed as so serious that a new regulator was needed, armed with stiffer powers and a broader remit, as recommended by the City grandee Sir John Kingman in a review for government. A white paper was issued in 2021 but a bill never made it on to the legislative agenda of the Brexit-consumed last Tory government. Now it won’t appear under Labour either.
The best that can be said in the government’s defence is that it is correct that the FRC, after a clear-out of old management, upped its game in subsequent years. The club looks less cosy now that the big four have separated their audit and advisory arms.
But the biggest flaw was always the FRC’s lack of statutory status to guarantee its annual funding and its powers to summon witnesses. If the FRC is being retained, rather than replaced, will it at least be put on statutory footing as a matter of absolute urgency? “As soon as parliamentary time allows,” is the government’s weak promise.
But there seems to be no intention even to try to resuscitate other elements that were previously viewed as vital. One was the proposal to bring the largest private companies into a tighter regulatory auditing system (the BHS failure happened at roughly the same time as Carillion’s). A second was the plan to give the regulator powers to hold to account directors who are not members of accounting bodies. If the government regards those proposals as inessential pieces of regulatory flummery, it should rethink. Private companies are getting bigger all the time and the FRC, not just the FCA, should be able to go after all directors in cases like Carillion.
A generation ago, in 2001, the US had its “Enron moment”, the bankruptcy of a major energy company amid an accounting scandal. Within a year, it had passed the Sarbanes-Oxley Act, which rearmed regulators and created criminal penalties for corporate misreporting. In the UK, the “Carillion moment” of 2018 has been met with eight years of ineffectual fiddling by successive governments that will result, maybe, in the bare-minimum requirement of statutory powers for the regulator being tacked on to some other financial bill. This does not feel like dynamism in action.
