The government has published its long-awaited proposals for accounting and auditing reform this morning. They are underwhelming, despite running to 232 pages.
At the core of the failure by the government on this issue is their adherence to a mid-twentieth-century view of what the company is all about. As they put it in their White Paper:
Shareholders, as the owners of companies, have a vital role to play in the corporate governance framework. They do not run companies — that is the job of the directors — but they do vote on director appointments, approve final dividends, approve the appointment of auditors and vote on directors' remuneration and other matters. Institutional investors, in particular, have a stewardship role, seeking to create long term value for their clients through oversight of the companies in which they are invested. Shareholders are the primary users of company reporting and audit. They should have a strong interest in its quality, accuracy and reliability because it provides a basis for informed investment decisions and the efficient allocation of investment capital across the economy.
This is so wrong. The reality is that even existing accounting standards setters accept that this is not true. The likes of the International Financial Reporting Standards Foundation do, for example, suggest that the primary users of accounts are the suppliers of capital to a company, which puts them many steps ahead of where the company are by also including other financiers apart from shareholders into the user group, but they too miss the point.
The reality is that the real stakeholders of companies, whose needs must be met if the corporate reporting that they prepare is to meet the needs of society, are the following:
- The providers of capital to the company
- The company's trading partners
- Its employees, past, present and future
- Regulators
- Tax authorities
- Civil society that is impacted by its activities in any way, plus researchers and others.
The odd token gesture apart, none of these get much attention. Employees are mentioned 26 times, pensioners not at all, suppliers eight times, and civil society not at all. Shareholders get 137 mentions.
The last is despite the fact that the report notes that:
There are concerns, however, that asset managers and asset owners do not sufficiently prioritise audit as a stewardship issue of importance2. Institutional shareholders have also been criticised for poor stewardship in the period before the collapse of some prominent companies. The FRC Review took a strong interest in the Stewardship Code, urging improvements to its effectiveness to increase the quality of investor engagement. These improvements are now in progress through recent revisions to the Code.
In other words, those institutions who represent most shareholders do not engage with audit issues, or the companies that they supposedly own. In other words, they are not the people who hold them to account.
This is completely unsurprising. Of all the stakeholders of a company the shareholders have the least engagement with it, and the greatest protection from it. They do, after all, enjoy the benefits of limited liability, which no other stakeholder does. In addition, they can, at a moments notice, sell their interest in the company, and cease to have any concern for its well-being.
Employees, suppliers, regulators and civil society have no such opportunity. For them the engagement can be vastly more serious, and the consequence of audit failure as a result much more significant.
Despite that, the report focuses almost all its attention on the wrong party. Shareholders should not have been the focus of interest when thinking about audit reform and yet the government has put them right at the centre of its concerns. As a consequence, it has shown that it does not understand the issue that it is addressing, and that is the biggest failing in this whole report.
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[…] already noted, the government has announced its proposed auditing and accounting reform process today. There is […]
As Peter Obourne has forensically pointed out, this Government is packed with liars.
That’s what they do. Lie. Say that they have sorted something out but when you investigate what they’ve done, it’s basically the other way around or not at all.
It’s PR – not policy.
People then perceive something has been done (when it hasn’t) and vote for them next time around.
232 pages! And not addressing the issues that are needed? I think I’ll trust your summary here, Richard, rather than read it all: but can I assume the blurb introduction they give:
“Major new reforms to the UK’s audit regime will aim to safeguard British jobs, avoid company failures and reinforce the UK’s reputation as a world-leading destination for investment, the Business Secretary has announced today (Thursday 18 March).
The UK is consistently placed as one of the leading destinations for foreign investment in Europe and around the world, but in recent years, investor and public confidence in how businesses are governed has been undermined by large-scale company failures, such as Carillion, Thomas Cook and BHS, leading to severe job losses and the British taxpayer picking up the bill.
To improve corporate transparency and strengthen the UK’s position as a world-class destination for investors, the government is launching a consultation on wide-ranging reforms to modernise the country’s audit and corporate governance regime, targeting the UK’s biggest businesses and ensuring markets work effectively.
Robust and rigorous scrutiny of large firms provided by auditors, as well as greater transparency and trustworthy information, is essential to ensuring that investors, employees and consumers have an accurate picture of the health of the company — underpinning a thriving, pro-enterprise business environment in the UK.”
,,, will not be achieved by the proposed reforms? That’s a bit rhetorical – as soon as I read ‘robust and rigorous scrutiny’ from the government (as well as all the thriving, world-leading, world-class, aiming to safeguard British jobs etc) I just know it’s going to be mince. If it was true reform, they wouldn’t need to pad it out with self-aggrandising statements.
Was this the review that you gave input to?
I like your CAN website!
I have input to previous reviews
I will be inputting to this one in due course, along with others
Few in civil society are going to be much taken with this and awareness of this issue is growing, thankfully
[…] to the FT  the White Paper proposals on audit reform might result in more than £430m of additional costs for business. There are those already bleating […]