Audit Reform and Corporate Governance bill: Reinforcing an urgent need for action

On Monday 8 September, a letter signed by more than 60 Parliamentarians called on UK Prime Minister Keir Starmer to prioritise the Audit Reform and Corporate Governance Bill.

The Chartered Institute of Internal Auditors coordinated the cross-party letter after it emerged in July that the draft bill had been delayed yet again. 

Currently, there is no IFRS Accounting Standard or guidance dedicated to accounting for carbon-related instruments. Consequently, companies have had to develop their own accounting policies to account for these instruments as either assets, liabilities, income or expenses. As a result, several accounting treatments are observed across companies.

On the assets side, these instruments are most often accounted for as ‘intangible assets’, followed by ‘inventories’ and ‘financial assets’. Some companies presented these instruments as ‘other assets’. Further, these instruments are measured at cost or at fair value (or a combination of both approaches). Some companies do not disclose their measurement approach at all. On the liabilities side, some companies recognise provisions on a gross basis, while others do so on a net basis. 

The size of these instruments, as a percentage of total assets or revenues, varies considerably among companies without being significant for all companies. This indicates that the instrument’s magnitude is not the sole determinant for recognition and disclosure in the financial statements. Nevertheless, there is room for improvement to provide information in the financial statements about these instruments’ nature, function, intended use, useful lives, amounts and accounting policies to help users understand their relevance and financial effects on the company. 

Relatively few auditors’ reports discuss issues around carbon-related instruments. Those that do tend to discuss issues relating to the exercise of judgement or the use of assumptions, such as accounting for carbon-related instruments, measurement of these instruments, impairment tests for assets, and changes in accounting policy. 

Gavin Hayes: It is very important that the Audit Reform and Corporate Governance Bill is published and passed as swiftly as possible. Boards, investors and other stakeholders must be able to rely on honest and accurate corporate reporting – not only on an organisation’s financial health but also on other business-critical matters.  

The bill will help deliver a strengthened audit regulator with the legal powers needed to hold company directors and audit firms to account when things go wrong. There have been far too many corporate collapses in recent years linked to poor audits and weak governance – precisely the issues this bill is designed to address. The failures of BHS, Bulb, Carillion, Greensill Finance, ISG, Patisserie Valerie, Thomas Cook and Wilko have all been associated, to varying degrees, with audit and governance shortcomings. These collapses have had a devastating impact on jobs, pensions, investments and smaller businesses in the supply chain. 

A swift decision by the new Business Secretary to prioritise the bill would be good for jobs, growth and investors. 

Gavin Hayes: Without swift action to prioritise the Audit Reform and Corporate Governance Bill in Parliament, there remains a real risk of further corporate collapses linked to audit and governance deficiencies. We’ve already seen this with the collapse of construction firm ISG last year, which reportedly held £1bn ($1.35bn) in public sector contracts at the time it went into administration. 

Given the current macroeconomic and geopolitical backdrop, businesses are operating in an increasingly risky, uncertain and volatile environment. Boards and investors need to be able to rely on honest and accurate corporate reporting to make sound decisions and take risks responsibly. Every time a corporate collapse is linked to audit and governance failures, it undermines confidence in the UK market. 

Gavin Hayes: The lack of audit reform is harming economic growth in several ways. The corporate collapses of recent years represent the opposite of economic growth and highlight the damage caused when companies fail due to shortcomings that might have been prevented with stronger market and regulatory oversight. 

The impact has been devastating for jobs and growth. Investors also need to rely on high-quality corporate reporting to make sound investment decisions – so audit reform is vital to preserving the UK’s status as a world-leading destination for foreign direct investment. 

Gavin Hayes: There is currently no publicly available, clear or detailed timeline for how long it will take to fully establish the new Audit, Reporting and Governance Authority once the bill has passed and received royal assent. However, with carefully planned and executed transition arrangements, it should be possible within months of the legislation passing. 

The Financial Reporting Council has already done much of the groundwork and is now awaiting the final piece of the jigsaw – its new statutory footing and legal powers. 

Gavin Hayes: We would encourage all professional accountancy bodies and accountancy firms to speak with one voice on the need for audit and corporate governance reform, and also to continue applying pressure on ministers to act.  

Now is the time to build on the momentum of our cross-party letter and continue making the case to the new Ministers at the Department for Business and Trade, and to Number 10. 

Gavin Hayes: A lot has indeed happened since the collapse of Carillion – and we have seen a series of further corporate failures that are linked to poor audits and weak governance. This only reinforces the urgent need for reform. 

The proposed legislation remains fit for purpose. It is needed to place the Financial Reporting Council on a statutory footing and give it the legal powers required to transition into the new Audit, Reporting and Governance Authority.  

Crucially, the Bill introduces measures to hold all company directors accountable for financial reporting failures, regardless of whether they are members of an accountancy body. This closes a significant loophole and ensures directors can face consequences for false or inaccurate reporting. 

The bill also proposes broadening the definition of Public Interest Entities (PIEs) to include the largest private companies, ensuring consistent regulatory oversight for businesses whose financial health has significant public interest implications.  

For example, major supermarkets like Tesco and Sainsbury’s are classed as PIEs because they are listed on the main London Stock Exchange. However, Asda – a business of comparable size, operating in the same sector and serving millions of UK consumers – is privately owned and therefore not subject to the same audit and governance requirements. 

Similarly, when companies such as BHS, Bulb and ISG collapsed, they were large private companies. Patisserie Valerie, listed on the Alternative Investment Market (AIM), was also outside the PIE regime. These cases highlight the urgent need to apply consistent standards to all economically significant companies, regardless of ownership structure or listing status. The bill will help to ensure that our audit and governance laws are up to date and fit for purpose. 

Gavin Hayes: We are very grateful to all Conservative politicians who have supported audit and corporate governance reform over the years, including those who signed our cross-party letter to the Prime Minister.  

It’s important to remember that it was the last Conservative government that put reform on the agenda by initiating the various independent reviews and publishing the white paper Restoring Trust in Audit and Corporate Governance. 

Prominent Conservative politicians – including Lord Martin Callanan, Kwasi Kwarteng, Kemi Badenoch MP and Kevin Hollinrake MP – all played leadership roles in advancing audit reform during their time in office. However, the size of the Conservative Parliamentary Party is now far smaller than before last year’s general election, and many of its members hold shadow ministerial posts, which prevents them from signing letters like the one we organised. 

Nonetheless, we are pleased that audit reform continues to enjoy strong cross-party political support, including from leading Conservatives such as Sir Geoffrey Clifton-Brown MP, who chairs the Public Accounts Committee. That’s exactly why the government should publish the bill and get it passed by Parliament. 

Main video supplied by kontekbrothers/Creatas Video via Getty Images

Auditors should:  

• check the coherence of information in the financial statements and the narrative part of an annual report, and  
• lend their technical expertise to support the development of globally applicable guidance for consistent accounting treatment of carbon-related instruments, and to help ensure the resulting accounting and disclosure requirements are auditable. 

​​​​​​​See here for the full report. 

Main image: Aaron Saw, head of Corporate Reporting Insights – Financial, ACCA