In an open letter published by CityAM (15 January), ICAEW’s Chief Executive, Alan Vallance, argues that audit reform legislation is needed now.

“In the past seven years, of course we had a global pandemic, but we have also seen a formal consultation, three reviews, and eight business secretaries. What we haven’t seen is legislation,” he writes.

“It could have been done under the previous government, but it wasn’t. The consequence of being too slow to fix issues relating to governance, assurance and trust has been to reduce the attractiveness of the UK to win investment and generate growth.”

While government action on audit reform has stalled, Vallance says that the profession has taken significant steps and audit quality has improved.

“The truth is, Carillion is ancient history,” he writes. “Firms have invested in new technologies, they have hired new staff, they have separated the operations of their audit and non-audit practices.

“Our profession does not and will not compromise on audit quality, and we won’t shy away from being critical where auditors do not meet the high standards that we demand. It is time to finish these reforms and close this chapter.”

Trust = growth

Vallance argues that legislation, if done correctly, will secure the economic growth the government wants to secure.

“In 2025, there is a pressing holistic need for economic growth, and that is rightly the first mission of the government. Our country needs growth, and to achieve that we must play to our strengths, of which professional and business services are a key part,” he writes.

“The sector is doing well, but finally creating a strong corporate ecosystem which injects trust into the economy will mean it can thrive. And that will lead to investment, which will lead to growth - and that’s what the bill should do.”

Director responsibilities, PIE-definition and market resilience

In his letter Vallance outlines three key areas that ICAEW, and its members, believe the forthcoming Audit Reform and Corporate Governance Bill should focus on:

• equality of director responsibilities;
• accurately identifying public interest entities (PIEs); and
• supporting a thriving audit market.

Enabling the regulator to hold all company board members to account for serious corporate reporting and audit failures is a vital step, he says. The legislation must also be able to ensure scrutiny of the country’s biggest and most important companies (PIEs). Vallance highlights the case of BHS which was not a PIE under current definitions.

“Careful consideration will need to be given to capture the right significant companies with a clear and significant public interest, while ensuring that auditors are not deterred from taking on this work.

"We think that using flexible criteria that responds to market changes is the right approach for this vital area,” he concludes.

Finally, Vallance argues that it is critical that the regulator has an objective of ensuring resilience and choice in the audit market, and that it must avoid placing “disproportionate burdens” on firms. This chimes with recent calls from the Chancellor and Business Secretary to ensure regulation fuels, rather than hinders, growth.

He says: “If these reforms involving the regulator are designed and implemented well, they will attract new firms to the PIE market and consolidate recent improvements in quality and resilience.”

Vallance concludes: “Reliable and trusted company reporting is fundamental to investor confidence, and this in turn is key to economic growth and stability. We need this legislation now, to turn the page on 2018 and to look to a future of sustainable economic growth.”