UK Government Scraps Audit Reform Legislation

The UK government has announced that it will not proceed with long-awaited audit reform legislation, which has been under consideration for nearly eight years, as part of its effort to reduce regulatory red tape.

“While the planned reforms would be beneficial, some would increase costs on business, and it would not be right to prioritise those over more deregulatory measures,” Minister for Small Business and Economic Transformation Blair McDougall wrote in a letter to the Chair of the House of Commons Business and Trade Committee. “We have seen considerable improvement in the quality of audit regulation, and of audit itself, and I am committed to continued support of the measures taken by the Financial Reporting Council and the audit sector to achieve these improvements.”

Audit quality in the UK has been under sustained scrutiny since the 2018 collapse of Carillion, a major construction and facilities management firm. The failure was widely criticized as reflecting weak governance and poor accounting, and ultimately cost British taxpayers more than £100 million.

In the wake of Carillion and other high-profile corporate failures, the government commissioned a review of the Financial Reporting Council (FRC), the UK’s audit regulator. The review, led by Sir John Kingman, concluded that the FRC lacked a clear statutory footing and had limited practical power over the audit industry. It recommended replacing the FRC with a more powerful regulator — the Auditing, Reporting and Governance Authority (ARGA). 

Proposed reforms have since been repeatedly delayed, and the government’s latest decision effectively ends the legislative path to ARGA for now. However, the government has left the door open to filling the gaps in the FRC’s statutory mandate. “[I]t remains important to have effective, proportionate regulation of audit and a regulator that has the right legislative set-up to do the job,” McDougall wrote in the letter. “We will still look to put the Financial Reporting Council on a proper statutory footing, as soon as parliamentary time allows.”

Industry bodies have criticized the government’s decision not to move forward with the legislation. “We cannot hide our disappointment that after many false dawns, the government has decided to scrap the Audit and Corporate Governance Bill,” said Alan Vallance, CEO of the Institute of Chartered Accountants in England and Wales. “The government had itself recognised that an Audit Reform Bill would increase global investor confidence in UK companies and increase the prospects of growth.” While Vallance acknowledged that “audit quality and firm governance and resilience are in a very different and vastly improved place from where they were in 2018,” he stressed that the “final piece in the puzzle is to give the FRC as regulator all the tools it needs to carry out its job.”

In 2023, Starling published “Renal Failure: A Crisis in Audit Culture?,” a Deeper Dive report into global concerns surrounding audit quality and professional conduct. Therein, we discuss the efforts of regulators, including the FRC, to reform audit quality and governance.