Background
In March 2021, the Department for Business, Energy and Industrial Strategy published a two-hundred-page white paper outlining proposals for new measures affecting directors, auditors, audit firms, shareholders and the audit regulator.
The aim was to strengthen transparency and rebuild trust in major United Kingdom companies, particularly those whose performance is central to public interest.
The push for reform began in 2018 following the collapse of Carillion, a major construction company. Carillion filed a claim of approximately one point three billion pounds against KPMG, its former auditors, alleging breach of contract and breach of duty for failing to identify its true financial position. Carillion’s report also criticised Deloitte, its internal auditors, and EY, which had provided turnaround advice. The collapse exposed significant weaknesses in the audit system and prompted calls for structural change.
Rachel Reeves, then Chair of the BEIS Committee, described the relationship between large companies and the Big Four audit firms as “parasitical,” noting that auditors continued to prosper even when companies and employees suffered. Carillion was not the only example. Other financial failures, including the liquidation of BLC, highlighted long‑standing issues within the audit sector and regulatory oversight.
Proposed Reforms
The 2021 white paper set out several key proposals intended to overhaul the audit and corporate governance framework.
- Strengthening directors’ obligations in relation to fraud.
- Establishing the Audit, Reporting and Governance Authority as a new regulator with greater powers than the Financial Reporting Council.
- Expanding the definition of Public Interest Entities to bring more companies under stricter oversight.
Two options were proposed for determining which companies would qualify as Public Interest Entities.
Option 1: More than two thousand employees, orA turnover exceeding two hundred million pounds and a balance sheet exceeding two billion pounds.
Option 2: More than five hundred employees, andA turnover exceeding five hundred million pounds.
Under Option 1, approximately one thousand nine hundred and sixty companies would fall within scope. Under Option 2, approximately one thousand and sixty companies would be included.
Present Status of the Audit Legislation
Despite initial momentum, ministers have scaled back several elements of the reform package. Reports indicate that the legislation may be delayed indefinitely, despite support from businesses and regulators.
Earlier proposals would have subjected at least four thousand additional private companies to enhanced scrutiny. Current plans reduce that number to approximately six hundred unlisted companies. Proposals to hold directors personally liable for financial reporting failures have been dropped. Instead, amendments will be made to the corporate governance code, applying only to large public companies, with opt‑out provisions available in certain circumstances.
However, the plan for the Audit, Reporting and Governance Authority to hold directors accountable for breaches of legal duties remains in place. This means directors, not only audit firms, may face sanctions.
Impact of Scaling Back the Reforms
Businesses and unions have warned that scaling back reforms could harm the United Kingdom’s audit sector and broader economy.
Comparisons have been drawn with the United States' Sarbanes‑Oxley Act (the Act), introduced more than 20 years ago to improve transparency and investor confidence.
Experts disagree on the long‑term effectiveness of the Act. Some argue that it improved audit quality and strengthened investor protection. Others note that it increased business costs and reduced productivity. However, the creation of the Public Company Accounting Oversight Board helped align shareholder interests with external auditing and improved confidence in the United States corporate sector.
The experience of the United States offers lessons for the United Kingdom. If implemented strategically and without dilution, audit reform could enhance transparency, attract investment and strengthen corporate governance. Scaling back reforms at a time when the United Kingdom faces economic challenges may lead to reduced transparency, lower investment and further corporate failures. The proposals have been discussed since 2018, yet they have not been enacted. It has been reported that the Audit, Reporting and Governance Authority may not become operational until 2024.
Conclusion
Audit reform presents an opportunity to modernise corporate governance in the United Kingdom. Businesses have expressed support for stronger auditing systems and clearer accountability. The Better Business Act coalition has recommended amending s. 172 of the Companies Act to update directors’ duties and reflect the social and environmental impact of companies.
The proposals in the white paper, combined with recommendations from the Better Business Act coalition, have the potential to reshape corporate governance for the better. For meaningful change, the government must commit to enacting the legislation and embedding it within United Kingdom law.
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