Audit reform is an issue that impacts just about every business in the UK. It’s one of the fundamental mechanisms to maintaining trust in a business for investors, shareholders and, indeed, the wider public.
When we see high-profile corporate collapses, such as Carillion and Patisserie Valerie, it rightly prompts searching questions given the fallout for those investing in a business, its employees, suppliers and sometimes the taxpayer.
Businesses are aware there are problems and the industry is open to change.
But this week’s report from the Business, Energy and Industrial Strategy Committee, which includes a call to break up the ‘Big 4’, jumps the gun. It’s a particularly heavy-handed suggestion considering the ongoing Byrdon Review is investigating how audit can be made more effective, now and in the future.
Let’s not forget that despite the recent headline-grabbing failings of some individual businesses, the UK is well-regarded, with a leading reputation on corporate governance around the world. The quality of the UK audit market helps to underpin this reputation. It’s a profession with highly-skilled individuals, with lots of integrity. It trains people who go onto careers in many parts of corporate Britain. It makes a significant contribution to UK competitiveness at home and abroad.
And with Brexit, the UK’s position as a stable, evidence-based country is already under threat. So rushing to simplistic measures rather than following a clear, considered long-term approach will damage our reputation further.
But changes must still come. Not least, given the rapid pace of technology transformation and its effects on business practices – far wider than the audit industry – any changes must support a system fit for the future.
Technology could transform how we assess the health of companies. And the audits themselves need to be robust enough to cover the wide range of responsibilities that companies have, beyond their financial performance.
Audit quality should be paramount. If the current model fails to match investor and stakeholders’ expectations, we need to explore what needs to change. And we should be asking what more might be done to provide forward-looking guidance and whether auditors can do more to identify and head off failings in the future.
In this context, the BEIS Committee report includes good suggestions to extend the scope of company audits, to make them more forward looking. The CBI hopes to see this as part of the Brydon Review. We also welcome the report’s recommendations to boost engagement with investors. And, in recognition that this is a global marketplace, it’s always good to see the UK taking the lead to enhance international standards.
But agreeing on what we want from audits in the future must be the starting point for any reform. Unless that is clear, the admirable determination to drive competition in the market is likely to miss the problem. A false move now could stem the flows of investment to the UK in the years to come.
Businesses and investors have asked the regulator for more evidence to back-up its proposed options for reform. The CBI stands ready to help facilitate this important work in the months ahead.
Rather than rushing to “do something”, policy makers should use the time until the Brydon Review concludes to identify which reforms can best promote audit quality, support UK prosperity and deliver lasting change that works for a global, growing Britain.