London – On 8 July 2021, The Chartered Governance Institute UK & Ireland responded to the Department for Business, Energy and Industrial Strategy (BEIS) consultation on Restoring trust in audit and corporate governance.
The main points in the Institute’s response were as follows:
- We completely agree with the Government’s expressed intention to restore trust in audit and corporate governance, but believe that this is more necessary in the former than the latter. The UK enjoys an international reputation for high-quality governance and trust in this regard is not as fractured as some may suggest. The issue of audit quality is fundamental here.
- In all the recent reviews of the audit market and its regulation, we have maintained a consistent line in our responses that there are three key issues that need to be addressed in order to improve audit quality. These are the expectation gap, the delivery gap and what we have termed ‘the Challenger challenge’.
- There is an enormous difference between the political, press and public expectation of the role of audit and what an auditor would perceive it to be as defined in the audit engagement letter. The proposed definition of audit will help to address this issue.
- Not only does the audit process not do what many in our society believe it should, it fails to do properly the bare minimum of what it is actually supposed to do. We support the creation of a separate audit profession and the additional powers and responsibilities being given to the Audit, Reporting and Governance Authority (ARGA) as it replaces the Financial Reporting Council (FRC). For some years, we have been concerned that the FRC has been expected to control the market to a degree which is beyond its powers. These proposals give it that power and are welcome.
- Competition in, and the resilience of, the audit market are both very important issues but we believe them to be different from the issue of audit quality. We therefore have doubts about the effectiveness of some of the proposals in this area, particularly those around managed shared audit, in addressing the audit quality issue.
- We strongly support the UK corporate governance model of ‘comply or explain’, which allows companies to put in place the most effective governance arrangements for their particular circumstances, and we would caution against diluting or, in some cases, removing this flexibility. We are concerned that a number of the proposals set out in the consultation document will replace provisions of the UK Corporate Governance Code with set rules. This, combined with the increasing number of internal management processes that are being put to a shareholder vote at the AGM, risks eroding the UK’s system of corporate governance.
- Our members believe that the UK’s reputation for corporate governance is very strong. We do not believe that more governance will necessarily enhance the UK’s reputation further. Although there have been some high-profile corporate collapses in recent years, corporate collapse is relatively rare. It is also difficult to argue that the measures proposed would have prevented those collapses. Consequently, we do not believe further increases in regulation and additional corporate governance are necessary and believe it is likely that the proposals will reduce the UK’s competitiveness.
- As part of the consultation process, we would encourage BEIS to engage directly with some large law firms and investment banks to understand the factors that companies consider when choosing whether to undertake a listing of their company and where to locate their company. We would also encourage BEIS to review the impact of the Sarbanes-Oxley Act on the number of companies in the US and foreign issuers that have subsequently chosen to delist and its effectiveness in preventing corporate failures.
Peter Swabey, Policy and Research Director at the Institute says:
“This is one of the most important consultations in the governance sphere for a number of years and I am grateful for the support of so many members who contributed to our response. We now await the Government’s conclusions in the light of responses received.”
The consultation can be downloaded at https://www.cgi.org.uk/assets/files/pdfs/guidance/Consultations%202011/2103-beis-restoring-trust-in-audit-and-corporate-governance-command-paper(1).pdf
and the Institute’s response at
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Notes to Editors:
The Chartered Governance Institute UK & Ireland is the professional body for governance and the qualifying and membership body for governance professionals across all sectors. Its purpose under Royal Charter is to lead ‘effective governance and efficient administration of commerce, industry and public affairs’ working with regulators and policy makers to champion high standards of governance and providing qualifications, training and guidance. As a lifelong learning partner, the Institute helps governance professionals to achieve their professional goals, providing recognition, community and the voice of its membership.
One of nine divisions of the global Chartered Governance Institute, which was established 130 years ago, The Chartered Governance Institute UK & Ireland represents members working and studying in the UK and Ireland and in many other countries and regions including the Caribbean, parts of Africa and the Middle East.