Reeves won’t fix profession where it ain’t broke

The chair of the Business, Energy and Industrial Strategy (BEIS) Committee says the audit profession is a “British success story” with a footprint throughout the UK and that reforms to the audit regime will not be allowed to kill the sector off

Speaking at an ICAEW roundtable in Leeds last week, Rachel Reeves said that the motivation behind the various reviews and inquiries into audit and audit regulation, including the BEIS committee’s own review of the “broken” audit profession, was the desire to see a thriving successful audit market re-established. As BEIS committee chair, she wanted to make people “proud of audit again”.

Pointing to the collapse of Carillion in January, she said that, although the joint inquiry by the BEIS and Work and Pensions select committees had laid the blame at the door of Carillion’s directors, early warning mechanisms, like the audit, which should have flagged the problems, failed to do so.

Carillion was not a unique case and it was clear that reform was necessary in order for audit and the audit market to work properly.

The BEIS committee review, which was announced last month, has been set up to ensure that the recommendations of the Kingman, the Competition and Markets Authority and the Audit Quality Forum (project Flora) reviews are implemented.

As Reeves said at the time, too often in the past, corporate and regulatory failures were followed by reviews which had then been left to gather dust rather than result in concrete action.

At the roundtable, which was attended by audit firms of differing sizes, she reiterated that the BEIS committee review would be keeping up parliamentary pressure on government to deliver the proposed reforms swiftly and effectively.

And she warned that if the reforms were not embedded in audit firms and their culture, then they should expect further action from government and regulators. “The regulation of audit won’t go away,” she added.

The roundtable also included a discussion about the problems facing the challenger firms in accessing the listed audit market and potential remedies.

There was widespread agreement among all the firms that separation of the audit arms would undermine the quality of audit, not improve it, and would lead to a loss of skills. Most also felt that joint audits might work as a transitional measure with challenger firms using the experience to eventually take over the entire audit.

However, they also felt that the way audit currently works does not lend itself to joint audits and that, if this avenue was to be pursued, then today’s model would need to be restructured.

There was general support for introducing a market cap, with an independent mechanism – again as a transitional measure – for allocating the work fairly between firms.

The firms also told Reeves that the profession was keen for change and there was a desire for members to “be able to hold their heads high again”. However, regulators and policymakers also needed to listen to the profession, in particular when it came to recognising the difference between the audits of listed firms and other, smaller firms.

Originally published in Economia, December 2018.