Below is an excerpt from ISS’ recently released paper “The Purpose of Audits: A Look at Developments in the United Kingdom“. The full paper is available for download from the ISS Governance online library.
In May 2018, UK multinational outsourcing giant Carillion collapsed with a calamitous loss of jobs, pensions, and investor value, and plunging hundreds of public sector projects into crisis. Its demise focused attention on its auditor, KPMG, who had delivered a series of unqualified audit opinions over nineteen years, “complacently signing off the directors’ increasingly fantastical figures” (UK Parliament Publications). Carillion joined a list of other high-profile UK public company failures, including Thomas Cook, BHS, Patisserie Valerie, Ted Baker, and London Finance and Capital. A decade before Carillion, the auditors of the major UK banks were described in a House of Lords report as a “significant contributory factor” to the banking crisis.
To address the erosion of trust, the government commissioned a trio of reviews into the UK audit market and product, which were conducted in the 2018-2019 period:
- The Competition & Markets Authority’s (CMA’s) Statutory Audit Services Market Study;
- Sir John Kingman’s Independent Review of the Financial Reporting Council; and
- Sir Donald Brydon’s report on Improving Audit Quality and Effectiveness.
These reports focused, respectively, on the audit market, regulation of audit, and the audit product itself. A report from the Business, Energy and Industrial Strategy (BEIS) Select Committee, The Future of Audit, aimed to co-ordinate the three.
The UK government responded in March 2021 by consulting on the audit and governance proposals mooted in these three reviews. The results of this consultation, Restoring Trust in Audit and Corporate Governance, was published in May 2022, and outlined a suite of planned reforms. By that stage, however, the political momentum behind the will for audit reform appeared to have slackened.
This sense of waning interest in the subject was re-enforced by the omission of a timetable for the planned audit reforms from the King’s Speech in November 2023. In particular, the absence of a schedule for the establishment of a new regulator, the Audit, Reporting and Governance Authority (ARGA), on which many other measures hinge, indicates that reforms are unlikely under the current government.
The lack of political appetite to pursue audit reform at pace runs counter to the urgency advocated in the reports of 2018-2019: in the words of the CMA, “each year that passes without any action taken runs the risk of major audit failures.” It has disappointed many observers seeking reform of a regime and a mindset captured in a comic poem quoted by Brydon in his review: “According to our figures the enterprise is wrecked/ But subject to these comments, the balance sheet’s correct.”
This paper examines the various dynamics at play in the UK audit market, the proposals that have been forwarded to restore confidence in audit, and the current impasse. While the focus is on the UK market, many of the issues discussed may have global resonance.
By: Jun Frank, Managing Director, Global Head of Compensation & Governance Advisory, ISS-Corporate
