The Government’s plans to reform the audit market are encouraging, says The Chartered Governance Institute UK & Ireland

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Corporate governance ensures appropriate decision-making processes and controls are in place in the interests of all stakeholders including shareholders, employees, suppliers, customers and the community. It provides the infrastructure to improve the quality of the decision-making: good quality, ethical decision-making builds sustainable businesses, enabling them to create long-term value.

While the UK’s reputation for corporate governance is strong,  a robust audit market is essential to building trust and maintaining the UK’s reputation as a good place to do business and the Institute’s focus is on the governance issues raised by recent audit failures rather than the impact of specific accounting decisions.

Peter Swabey, Policy and Research Director, said: “The Institute has consistently argued, throughout the various reviews of the audit market, that there are three fundamental issues to be addressed:

  • The expectation gap – the difference between the political, press and public expectation of the role of audit and what an auditor would perceive it to be;
  • The delivery gap – the Financial Reporting Council has indicated that only 71% of audits reviewed last year did not require improvement or significant improvement; and
  • The perceived capability gap between the ‘big four’ and the challenger audit firms.

The Government’s plans go a long way to addressing these issues. Key amongst these is the creation of a new regulator for the audit profession, the Audit, Reporting and Governance Authority (ARGA) – with tougher enforcement powers; powers which the Financial Reporting Council sorely lacked.

It is also encouraging to see the largest unlisted companies brought within the scope of this regulation as such companies have a significant impact on the wider economy and benefit from the privilege of limited liability.

Our key concern over the Government’s plans remains the practical one of the balance between the need to address the unhealthy market dominance of the ‘Big Four’ audit firms and the need to improve the quality of audit. It is not easy to see how this balance can be achieved.”