The UK is rightly seen as world-leading in the sphere of corporate governance and audit.

But part of the reason we are so well respected is that we don’t rest on our laurels. We are always looking to improve the way we do business. And one area that I know requires real change is audit.

Having spent 25 years in finance, I know how important audit is. It goes to the heart of how our businesses are run, how they are regarded around the world and ultimately how they are trusted by the wider public. And trust is often the very foundation of successful business.

But it’s clear that our current audit system is imperfect, and that is why the Competition and Markets Authority (CMA) has proposed a radical shake-up of the audit market. Change would affect a large number and a wide variety of companies, firms, and interests; but I wholeheartedly agree that it is needed. 

The CMA has argued that an absence of choice, coupled with a market dominated by the same firms, are not best serving those who rely on audit to assure the accuracy of company accounts. They also argue that the market as it currently stands does not provide resilience, or an environment in which dynamic new players can enter, compete on quality, or invest for the future. It is certainly true to say that in recent years the public’s trust in audit has decreased – and that is reason enough to be concerned.

I want the UK to be the best place in the world to work and to grow a business. That includes reforming audit, the audit regulator, and the audit market. I have made clear in parliament my commitment to taking forward reform; and I have no doubt there is a need for truly long-lasting, and effective change.

Some changes must be made urgently and where that is the case, we have been taking firm action. The Financial Reporting Council’s annual Developments in Audit publication shows that still too few inspected audits are failing to make the grade; more audit firms are now subject to increased supervision by the regulator; and there are concerns that firms’ root cause analyses simply aren’t working.

We need a strong regulator with real powers to address that.

And although legislation will be essential to complete the creation of the Audit, Reporting and Governance Authority, there is much that is being done now. Starting with new leadership at the Financial Reporting Council, driving a new vision and culture for the regulator, it’s now implementing those recommendations made in Sir John Kingman’s excellent report that are not contingent on legislative change.

But let me be clear: we can and will do more. It is my intention to develop a programme of audit reform with the benefit of all the expert advice that has been commissioned. This will include Sir Donald Brydon’s recommendations, which I look forward to receiving.

Reform will cover not just the function of the regulator, but also the purpose and function of audit itself. It will include proposals on the function and oversight of audit committees and new internal control arrangements within our great British businesses – key lines of defence against poor corporate governance. It will also include proposals on the responsibilities of boards and directors – who need to build trust in the business activities that they lead. And reform will also look at how both investors and regulators can better hold companies and their auditors to account. All of those factors must be assessed and weighed together, so that the whole package is coherent and effective.

No one I have spoken to has argued that audit reform is simple; that it should be done in haste; or that significant elements should be taken forward in isolation. But it is clear that a coherent programme of change is needed – driving up quality, resilience and choice.

So, as a business secretary who is committed to raising standards across the board, you can be sure I will bring this forward. I want to see the UK leading the world in the next phase of improvements in corporate governance and audit reform.

Andrea Leadsom MP is the secretary of state for business, energy and industrial strategy

Originally published in Economia, November 2019.