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A Labour government would push through long-delayed reforms to the UK’s audit and corporate governance regimes, which were first promised years ago after a rash of scandals, shadow business secretary Jonathan Reynolds has told the Financial Times.
Ministers in the current Conservative government have long pledged to shake up the audit and corporate governance regimes after scandals at companies including retailer BHS in 2016 as well as cake chain Patisserie Valerie and outsourcer Carillion in 2018.
An overhaul of the audit and corporate governance regimes has been on the cards since a report by Sir John Kingman almost five years ago that recommended the replacement of the Financial Reporting Council with a more powerful watchdog for UK boardrooms and accountants.
The government has promised legislation to implement proposals including creating a more powerful regulator called the Audit, Reporting and Governance Authority (Arga). The changes would also classify about 600 additional private companies as “public interest entities”, which face tighter regulation.
Last year the government promised in the final Queen’s Speech that it would produce a draft bill on audit reform during the current parliamentary session, but this has still not happened.
Nor are the reforms expected to be included in the King’s Speech in November — which sets out the calendar for the next parliamentary year — the FT revealed last month.
As a result the FRC has been planning on the basis that the beefed-up regulator Arga may not be up and running until 2026 or 2027.
Government insiders have blamed a lack of parliamentary time, while insisting some of their reforms can still be carried out via secondary legislation.
But the most important reform — putting Arga on a statutory footing — can only be done through primary legislation, Reynolds said in an interview with the FT. “The fact that it was mentioned in last year’s Queen’s Speech was an acknowledgment that you need legislation to do this,” he said.
“We feel that this government has not just delayed it, we think it’s dead. We think it’s not coming,” he said.
If Labour wins the next general election, expected next year, it will enact the proposals in full as soon as possible, Reynolds said.
“We would replace the FRC with the new proposed Arga, which will be the new body with teeth at the heart of this, which does require legislation,” he said. “I cannot see an argument for it not progressing.”
Reynolds said he could not guarantee that the legislation would be in the first King’s Speech of a Labour government but said “it is a priority for us and it will be part of our commitments for the next government if we form it”.
The FRC has doubled in size to 450 people in the last four years, imposed higher fines on auditors for substandard work and is consulting on changes to the corporate governance code for large listed companies — all without legislation.
But Sarah Rapson, acting FRC chief executive, recently warned that without legislation the regulator could not take on a bigger role in policing directors of companies or introduce measures to increase competition for the Big Four accounting firms by making them share audit work with smaller rivals.
There is frustration among some accounting executives and within the regulator at the repeated delays in bringing forward legislation needed to create the new watchdog and give it extra powers, including over company directors.
Hywel Ball, UK chair of EY, said he understood that ministers had to balance priorities but warned: “At this pace of change it could be almost 10 years since the Kingman Review before we see any change in law.”
Changes would “lack teeth” without primary legislation, he said. “Good companies will abide by them, bad companies won’t.”
“The reform debate has been going on far too long,” said Mike Suffield, director of policy and insights at the Association of Chartered Certified Accountants.
“We continue to believe that legislative change is necessary to give full effect to the crucial reform proposals to create a strong and effective regulator, and underpin high quality audit,” he added.
Bruce Cartwright, chief executive of the Institute of Chartered Accountants of Scotland, said: “Audit reform cannot wait until after the next general election . . . There is consensus around these reforms and recognition that this is long overdue.”
The government said ministers remained “committed to improving audit and corporate governance” and that legislation would be introduced “when parliamentary time allows”.
“Reform is already under way — the FRC has transformed the way it works, is consulting on changes to the corporate governance code, and now has more powers to ban inadequate auditors from reviewing large companies’ accounts,” it added.
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