External Auditing of Companies: Deficiencies

Lord Leong Excerpts

Monday 14th October 2024 Lords Chamber

[Lord Leong (Lab)]

My Lords, I am pleased to respond to this Question for Short Debate. I thank my noble friend Lord Sikka for introducing it. I commend my noble friend for his commitment to and tireless campaign for more effective auditing. I thank all noble Lords for their valued contributions.

When companies fail suddenly, jobs and lives across the UK are affected. Many noble Lords mentioned that 11,000 jobs were lost when BHS collapsed. Carillion’s failure left approximately £4.9 billion of debt, affecting around 7,000 first-tier suppliers and contractors and displacing 19,000 UK jobs.

The Government therefore want to address the financial reporting issues that have been factors in some recent corporate failures. This is part of our mission for growth. Confidence in the audit regime is vital to ensure that our leading companies command the confidence of financial markets and the investment community. Through fair and reasonable regulations, we will boost investment and create sustainable long-term growth for the country.

We are looking at changes in three broad areas: a new powered-up regulator; new accountability for companies, directors and finance professionals; and new measures to help the audit market work better. First, we intend to transition the current audit regulator, the Financial Reporting Council, or FRC, into a new statutory body. The audit, reporting and governance authority, ARGA, will have new responsibilities and enhanced powers to tackle bad corporate reporting.

The second core area is to look at new and better systems to hold companies, directors and finance professionals to account. We are therefore looking to extend public interest entity status to the largest private companies, making sure their audits are of high quality and their reporting is within ARGA scrutiny. We will also seek to ensure proper accountability for company directors. We will therefore look to give ARGA powers to investigate and sanction company directors for serious failures in meeting their existing duties and responsibilities relating to accounts, corporate reporting and audit.

Regulatory oversight can help build and maintain trust in the profession. We want to ensure that professional bodies are properly accountable for their roles in regulating their members, with ARGA able to step in to tackle serious breaches of standards. We are also looking to improve the UK’s insolvency regime, including significant reforms to the regulation of insolvency practitioners.

Thirdly, we want to help the audit market work better. We want to address the lack of choice and resilience in the audit sector. Many noble Lords have mentioned the big four firms, PwC, KPMG, Deloitte and EY. They audit almost all the UK’s largest listed companies. We will look to find a balance in the PIE market between choice, resilience and quality. There are complex choices involved and we expect extensive engagement on these issues.

The Government set out in the King’s Speech their intention to publish a draft Bill on audit and corporate governance in this parliamentary Session. I look forward to this House’s expert scrutiny of our proposals in due course. I will of course update noble Lords on progress on the Bill, as the Government carry out their mission to go for growth at every opportunity.

I now turn to some specific points raised during the debate. My noble friend Lord Sikka asked about standards. Global standards make it easy to compare information across different regions, thereby facilitating the international movement of capital. These standards are assessed for their suitability and adoption in the UK. The UK has been a leading proponent of the use of IFRS. The UK also supports the development of international standards covering sustainability issues by the International Sustainability Standards Board. We will assess these standards for their suitability for adoption in the UK and consider how this affects non-financial reporting.

My noble friend Lord Sikka asked about audit competition—I mentioned the big four earlier. We are analysing all potential regulatory barriers to competition in the market before deciding how to proceed. Decisions on whether to remove any regulatory requirements that might be a barrier to competition will need to take account of any risk to other objectives such as higher audit quality and auditor independence.

My noble friend Lord Sikka and the noble Lord, Lord Livingston, asked about audit committees. The Government intend to give ARGA the power to set minimum requirements for audit committees in the appointment and oversight of auditors. These requirements will be enforceable. My noble friend Lord Sikka asked about the oversight of various other accountancy bodies. This is part of the Kingman review and there are still three outstanding recommendations that are yet to be adopted, on the oversight of the accountancy profession and the independent auditor’s report. Work is under way to address them.

The noble Lord, Lord Shipley, asked about local audits of public bodies. The backlog of publication of audited accounts of local bodies and public sector bodies in England has grown to an unacceptable level. The number of outstanding opinions peaked in September 2023 at 918. As of 31 December 2023, the backlog of outstanding opinions stood at 771. The local audit system is broken. This is evidenced by only 1% of local bodies having published audited accounts on time for the financial year 2022-23. The Government will update Parliament in the autumn.

I thank the noble Baroness, Lady Ford, for her work on corporate governance and congratulate her on her appointment as chair of the Centre for Public Interest Audit. We look forward to the findings of the PIA audit research later in the year.

My noble friend Lady Warwick asked about the timeframe and whether we are going to give priority to this draft legislation. As she noted, this Government announced an ambitious plan for legislation in the King’s Speech. As she knows, we have announced our intention to publish this Bill in draft and for it to be subject to pre-legislative scrutiny. I would therefore like to reassure her and the House that we fully expect to publish our draft legislation in line with the intentions announced in the King’s Speech.

My noble friend also asked whether we can ensure that all directors in the UK will face consequences if they neglect their duties. I can assure her that, as announced in the King’s Speech, the Government intend to provide the regulator with powers to investigate and sanction companies for serious failures in relation to their reporting and audit responsibilities. There are consequences for putting forward dodgy accounts.

My noble friend Lord Davies of Brixton asked about actuaries. The FRC has statutory duties and responsibilities for audit, delegating some of those functions to professional bodies while overseeing the accountancy and actuarial professions on a largely non-statutory basis. The Government will set out their approach to the regulation of actuaries in due course.

The noble Lord, Lord Livingston, asked about FTSE companies and I think the noble Earl, Lord Effingham, asked about sharing auditors. We are considering carefully the possible impact of shared audits for any companies, especially listed ones, and changes to the operating structures of audit companies, as part of our policy development on competition, choice and reliance in the market.

The noble Earl, Lord Effingham, asked about the legal and enforcement powers of ARGA. As I said earlier, we will look to give ARGA appropriate enforcement powers, including the power to investigate and sanction company directors for serious failures in meeting their existing duties and responsibilities relating to accounts, corporate reporting and audit.

The noble Earl also asked whether the Government would force large UK-listed companies to provide an annual resilience statement. Our overall aim is to make corporate reporting simpler, proportionate, useful and effective, but we may consider new reporting measures if they contribute to this aim. On company culture, ARGA will have appropriate powers to scrutinise the audit industry. I fully agree that a culture of professional scepticism should be built in.

The noble Earl asked whether the Government would commit to meeting senior representatives of the big four and other stakeholders. We will listen carefully to stakeholders on the substance and language of the planned draft Bill. We may consult formally on some related issues and will update the House in due course on any plans to do so.

I was asked what the Government would do to ensure that all companies of a certain size, not just auditors, focus on strong controls and corporate governance. We intend all companies above a certain size to have the extra scrutiny and accountability of public interest entities.

I thank all noble Lords once again for their contributions to today’s debate, and I look forward to keeping the House updated as we work towards the publication of our draft Bill.