It is difficult to overstate the concern — or fully convey the disappointment and frustration — felt by investors at the news that the UK government has scrapped the long-awaited audit reform legislation (“Audit reform bill scrapped in effort to reduce business costs”, Report, January 20).
Since the collapse of Carillion in 2018, investor organisations have devoted substantial time and resources to engaging with successive independent reviews and consultations on audit reform, including Sir Donald Brydon’s 2019 report and Sir John Kingman’s review of the Financial Reporting Council in 2018. This engagement was undertaken in good faith, on the expectation it would lead to meaningful legislative change.
The Department for Business and Trade has justified abandoning the legislation by citing “improvements in audit quality in recent years” and a desire to “prevent significant new costs for large businesses”. Yet no evidence is offered to support claims of improved audit quality, particularly in light of continued failures such as Thomas Cook, Patisserie Valerie and Wilko.
The DBT also states it will press ahead with “modernising corporate reporting” and consult this year on co-designing changes with companies and investors. After eight years of engagement, investors are entitled to ask why they should devote further time to a process that experience suggests often doesn’t result in needed reforms. Further, such “modernisation” is — for investors — a euphemism for reduced transparency.
The UK government appears increasingly focused on deregulation in the mistaken belief that weaker oversight will make UK capital markets more attractive. Abandoning audit reform and reducing transparency impose a far greater — yet persistently unquantified — cost: increased risk borne by investors as a result of weaker assurance, accountability and transparency.
Because investors own the companies subject to regulation, it is investors who ultimately bear these costs and investors have been clear in their support for audit reform, with no call for reduced transparency, particularly in an era when corporate reports are analysed by machines in seconds. If this direction continues, investors will demand a higher equity risk premium, making the UK market less attractive.
Sandra Peters
Senior Head of Global Financial Reporting Advocacy at CFA Institute; Member of the FRC’s Stakeholder Insights Group; Former Member of US Securities and Exchange Commission’s Investor Advisory Committee, New York, NY, US
