Audit and corporate governance reform: A broken record?

Visiting a museum recently I was delighted to see a replica of my first vinyl record player. I remember vividly how the needle would click in to place, glide smoothly and produce great sounds, lift off and repeat endlessly if so desired.

The accountancy profession’s desire for audit and corporate governance reform seems to be on that same turntable. Play and repeat but don’t change the song. I began my role as CEO in January 2018 as Carillion collapsed. This followed failings at BHS and subsequently at Patisserie Valerie, and there was an inevitable focus on these failures and their causes.

Fast forward to three landmark reports – the Kingman Review, the Brydon Review and one from the Competition and Markets Authority – all highlighting the need for reform. I recall listening to Sir Donald Brydon introducing his report and quoting from another report of more than 20 years earlier which remained unfulfilled. He hoped this time it would be different. I can only surmise that Sir Donald is scratching his head wondering whether the turntable was replaying the same old song.

The King’s speech in November would have been the perfect opportunity for the government to demonstrate it was serious, that all the evidence pointing to a lack of interest was not as conclusive as it appeared.  Yet, the 21 pieces of new legislation spanned everything from banning goat exports to licensing London pedicabs, while the proposed Audit and Corporate Governance Reform Bill didn’t get a look-in. Following the government’s decision in October to ditch draft regulations to improve corporate reporting, it now feels like the record player has been unplugged.

And yet we’ve been waiting much longer than since 2018 for this to happen. A 1950s book recounting the first 100 years of ICAS refers to the famous “audit expectation gap” and notes that without urgent focus and attention to this area the profession would continue to be misunderstood. Seventy years later, the holistic three-legged stool – of corporate governance, corporate reporting and audit – is still not appropriately balanced. And as all accountants will vouch, balance matters.

There’s plenty of support for a more robust regulatory environment, not just from the accounting industry, but the wider business community and public alike. The government has even shown glimmers it wants this to happen too, with a draft audit and corporate governance reform bill included in the briefing notes to the Queen’s speech in 2022, highlighting the intention to replace the Financial Reporting Council with the new Audit, Reporting and Governance Authority. Yet, the plan seems indefinitely sidelined as we’ve gone through four prime ministers, including one – Boris Johnson – whose advisers reportedly considered the subject “boring” according to the Financial Times.

We all recognise that reform of audit and corporate governance is not a vote-winner, and it’s unlikely to be top of the agenda for a new government. But let’s be clear, there has been tremendously constructive dialogue, a willingness to change the status quo and move forward, and it will be hugely disappointing if the song ends on this note. The myth that the proposed reforms would have resulted in acres of red tape for business doesn’t help matters. The Department for Business and Trade shelved plans for stricter company disclosure, describing them as “burdensome” and its new “smarter regulation” programme has also stoked fears the government, rather than strengthening regulation, will shy away because of the bureaucracy it might generate.

When the next significant corporate failure occurs, will we see much noise to resurrect the robust regulatory framework that has been put in cold storage? If you follow the evidence you wouldn’t be placing any bets on its introduction any time soon. But it is not the profession which has ducked the need for reform at legislative level – that decision rests with a higher power. Ultimately, we will move forward as best we can on a “voluntary basis” with a lack of clarity or belief in the government’s true enthusiasm, despite the record being occasionally flipped.

We need also to consider our global competitiveness – strong corporate governance improves financial viability, attracting investment and improving stock market performance, as well as rooting out the wasteful parts of a business. It would, in other words, help with the growth agenda.  A thorough overhaul would send a strong message to the rest of the world that the UK is one of the most attractive countries to do business in. Even the government realises this – in May 2022, it said such an overhaul would “ensure the UK sets a global standard”.

As CEO, I don’t want to come across as a stuck record. I would rather liken the progress of this reform to my Spotify account, able to switch and adapt with ease. But unless and until we see actions supporting the statement of intent, then vinyl on repeat it will be. And as the record repeats ad infinitum, the voices will grate and somebody somewhere will have to pick up the needle and put on a new tune. That would be music to everybody’s ears.