In the week of the fifth anniversary of the collapse of Carillion, ICAEW’s Chief Executive Michael Izza has warned that a lack of progress on audit reform is in danger of stalling economic growth and injecting much-needed confidence in the UK economy. 

Half a decade since the failure of the outsourcer and despite a series of investigations and Ministerial pledges for an overhaul of audit regulation, actual reform is yet to emerge.

Izza says: “It’s hard to believe we are still talking about audit and corporate governance reform five years after the collapse of Carillion. I’m concerned that all the excellent reports that have been produced are increasingly looking time-expired as the world has moved on since 2018.” 

A joint enquiry report issued by the Work and Pensions and Business, Energy and Industrial Strategy (BEIS) Committees on 16 May 2018 placed responsibility for the collapse on the board and senior leadership of the company describing its business model as “an unsustainable dash for cash”. 

However, the report also drew attention to the audit profession and shed light on areas in need of improvement, including a “failure to exercise professional scepticism” and a “crisis of confidence in the audit profession”. The role of the construction firm’s auditor, KPMG, came under particular scrutiny over its failure to spot any red flags when screening the firm’s accounts. 

Carillion’s collapse had a catastrophic impact on the UK economy – a National Audit Office (NAO) report published in June 2018 estimated it would cost UK taxpayers an estimated £148m, warning of wider costs to the economy, Carillion’s customers, staff, the supply chain and creditors.

But Izza has long said that the scandal was a watershed moment for the profession and that there are lessons to be learned to restore public confidence in audit. As we emerge from the aftermath of COVID-19 and with economic uncertainty rife, there are concerns that momentum on audit reform is in danger of being lost.

“We understand that the legislation has been drafted but is awaiting ministerial sign off and a slot in the parliamentary calendar. It’s disappointing that we remain in limbo. I appreciate there have been other bigger issues and priorities to deal with, but if the political will was there, the government could find time. Having six secretaries of state for business over the past five years also hasn’t helped matters,” Izza says.

Although audit and corporate governance reform was a manifesto commitment, it’s not an obvious vote winner, Izza warns. “The longer it gets kicked into the long grass, the higher the risk that it becomes even less of a priority with a general election looming in 2024. This poses a risk to UK plc at a time when we need to grow.

A strong and respected audit and corporate governance sector will help boost confidence and investment, Izza says. “We’ve had a global pandemic and are currently facing yet another economic crisis. Technology has advanced and the issues of the moment, such as ESG reporting and the transition to net zero, were not front of mind in 2018.”

In July last year, following a long period of consultation over what UK audit and corporate governance should look like, the FRC published its position paper outlining the steps it will take to fulfil its part in the process of audit and corporate governance reform, as laid out in the UK government’s feedback statement on the reform agenda. 

Initial reactions to the feedback statement were muted at best, disappointed at worst, with many commentators pointing to watered-down proposals, the lack of clarity around some measures and the vague timeline. 

However, Izza says it is important to recognise that there has been progress in key areas over the past five years. “The FRC is now a very different organisation to 2018 and firms have voluntarily taken steps to improve the quality of their audits. But we still need to urgently get FRC’s replacement, the Audit Reporting and Governance Authority (ARGA) up and running, and that requires primary legislation to happen.”