Taxpayers, third-party vendors and, of course, shareholders were all on the hook due to the 2018 collapse of construction group Carillion. In the recriminations that were to follow, and amid deflections by government, the general sentiment was that it could – and should – have been avoided. After all, three years prior to the unravelling of the business, UBS had raised concerns over the possibility that the group had understated its indebtedness, citing potential red flags ranging from extended supplier payment terms to concerns over third-party financing.
In the period leading to the collapse, the contractor became one of the most heavily shorted stocks on the London Stock Exchange. It was promptly demoted from the FTSE 250 index, and was forced to book multi-million-pound impairments on loss-making projects under the government’s benighted Public Finance Initiative.
Parliamentary inquiries duly followed into the conduct of Carillion’s directors, the competency of its auditors (KPMG), and the role played by the Financial Reporting Council (FRC) - the Pensions Regulator also came under scrutiny. It was an unholy mess, but the demise of the business, along with several other high-profile entities, finally stirred the government into action, thereby prompting an independent review of the future of audit, chaired by Sir Donald Brydon.
Last week, a Briefing Paper was released from The House of Commons Library, which fleshed out some of the points recently covered in these pages by James Norrington. The problems bedevilling the UK audit industry are now widely understood: an overconcentration of top-tier mandates among the big four (PwC, Deloitte, KPMG and EY); limited regulatory powers to enforce action against directors for breaches of their duties; and conflicts of interest arising from auditors engaged in lucrative advisory contracts with the same companies they are auditing.
The FRC in its present form is viewed as something of a paper tiger, so the government is proposing legislation to replace the FRC with a new body, the Audit, Reporting and Governance Authority (ARGA), funded by a new statutory levy from market participants.
Under ARGA’s expanded purview, the entirety of a company’s annual report will be brought within the scope of the review of the new regulator, including the directors’ remuneration statements. ARGA would also have powers to insist on changes to company reports and accounts, rather than going through the courts, along with a statutory role in supervising accountants and actuaries.
Interested parties have until 8 July 2021 to respond to the proposals, but apparently there has already been some push-back, primarily by parties who believe increased red tape and the planned levy would load unnecessary costs on businesses. But perhaps the most contentious proposal (though hardly radical) is that companies may be compelled to disclose the amount of their distributable reserves and/or require directors to state that any proposed dividend is within known distributable reserves – that could potentially spell trouble for income seekers given the way that some companies fund their distributions in lean years.
