In a disappointing turn of events, the UK government has abandoned its long-promised overhaul of the audit industry, opting instead to prioritize “more deregulatory measures” over much-needed reforms. This decision comes eight years after the collapse of Carillion, a major construction and contracting firm, which exposed systemic flaws in the country’s audit practices and sparked near-universal calls for a major upgrade.
The collapse of Carillion, which resulted in the loss of nearly 3,000 jobs and a £150 million government bailout to maintain basic services, was a wake-up call for the industry. The shocking speed of Carillion’s downfall, from its first profit warning to full calamity, highlighted the urgent need for stronger audit regulation and oversight.
In the aftermath, a review by City grandee Sir John Kingman recommended the creation of a new, more powerful regulator to oversee the audit industry. A white paper was issued in 2021, but a bill never made it onto the legislative agenda of the previous Tory government, which was consumed by Brexit. Now, the Labour government has also decided to forgo the much-anticipated reforms.
The government’s defence is that the Financial Reporting Council (FRC), the current regulator, has improved its performance in recent years, and that the separation of audit and advisory arms within the “Big Four” accounting firms has made the industry less cosy. However, the FRC’s lack of statutory status to guarantee its annual funding and powers to summon witnesses has long been a major flaw.
While the government has promised to put the FRC on a statutory footing “as soon as parliamentary time allows,” it seems there is no intention to resurrect other previously vital proposals. These include bringing the largest private companies under tighter regulatory scrutiny and giving the regulator the power to hold all directors, not just those who are members of accounting bodies, accountable in cases like Carillion.
The government’s decision to prioritize “pro-growth” measures over meaningful audit reform is a concerning step backward. In the United States, the Sarbanes-Oxley Act was passed within a year of the Enron scandal, rearming regulators and creating criminal penalties for corporate misreporting. In contrast, the UK’s “Carillion moment” of 2018 has been met with eight years of ineffectual tinkering, resulting in the bare minimum of statutory powers for the regulator.
This lack of dynamism and decisive action on audit reform raises serious questions about the government’s commitment to ensuring the integrity and transparency of the UK’s financial sector. As private companies continue to grow in size and influence, the need for robust regulatory oversight has never been more pressing. The government must reconsider its priorities and take urgent action to restore public trust in the audit industry.
