THE UK GOVERNMENT’S AUDIT REFORM PROPOSALS do not go far enough to fix the scandal-ridden industry, not least because they fail to adequately cover fundamental issues like climate change and reform of underlying accounting principles.

This is the warning from nine campaign groups and experts including Greenpeace, ClientEarth, the Fair Tax Foundation and academics from Sheffield and City Universities.

Professor Atul Shah, City University, said: “It’s been over four years since the Carillion scandal, but despite numerous reports and a parliamentary inquiry the government has set out watered down plans with no clear implementation date. Britain has a record of systemic failure in Corporate Governance which has led to widespread economic and social fallout. This needs to be urgently averted through audit reform – and while Business Secretary Kwasi Kwarteng promised to make it a priority, he has failed to deliver. The next big audit failure may be just around the corner – in light of these weak reform proposals, the government must accept its share of responsibility when it happens.”

Professor Richard Murphy, University of Sheffield, said: “When audits fail thousands of people can lose their jobs and millions of pounds can be lost through unpaid taxes and bills owed by failed companies, Reforms to shake-up the audit profession are urgently needed, but unfortunately the government’s proposals fall well short of what is required. Much more must be done to tackle conflicts of interest faced by auditors, to ensure the data subject to audit meets user needs, and to require that auditors properly sound the alarm over business risks. Audit might not be the most exciting issue but it is important, and these half-hearted reforms fail us all.”

Charlie Kronick, Senior Programme Adviser at Greenpeace, said: “Polluting companies and their auditors are still failing to integrate climate change into their financial statements, despite the surge of net zero claims from corporates as well as investors. Over-valuing fossil fuel assets will continue to result in the misallocation of capital, not only driving climate change, but also wasting investors’ money. The government’s response to its consultation failed to include climate change so for now it’s up to shareholders to fix the problem. Investors must push for greater transparency on the financial impact of climate change, and vote to hold auditors and directors accountable.”

Some examples of people affected by high-profile audit failures:

  • When Carillion collapsed, it owed Flora-tec Ltd, a grounds maintenance company in Cambridgeshire, £650,000 – which Flora-tec has still not got back. Carillion was Flora-tec’s biggest client at the time, and its collapse had a huge impact on the firm. CEO Andy Bradley said: “We had to almost immediately start to let people go in order to reduce our cost base. Within that first week we’d let ten out of the 80 people we employed at that time go. In my opinion the relationship Carillion had with the auditors KPMG was too cosy, it was like the fox guarding the hen house. Large accountancy firms make massive sums of money from their clients and as such they can lose sight of the real purpose of an audit.”
  • Katy Walker worked at Thomas Cook for 30 years, but lost her job in 2019 when the company collapsed after 178 years of business. She was “absolutely devastated”. She said: “On a Friday night in September the news went round the staff WhatsApp group … I was thinking ‘I’m not going to be going to work on Monday’”. Katy was given a number to ring by her employer and then was told “Thomas Cook is no more, you need to go to the Job Centre”. Both PwC, who audited the company from 2007 to 2016, and EY – who were the auditors from 2017 – were heavily criticised for signing off the accounts of the troubled company throughout those years. EY was placed under investigation by the audit regulator in October 2019.
  • Other people affected include Ross Topping, who lost his job at Patisserie Valerie after auditors failed to spot potentially fraudulent accounting irregularities, and retired BHS employee Lin Macmillan, who campaigned for Philip Green to “sell the yachts and pay the pensions” when her retirement income was at risk when the retail chain collapsed.

Fanny Malinen, Research For Action said: “Audit failure doesn’t only pose risks in the corporate sector: the same companies audit local authorities in England. In the last five years, three councils have effectively declared themselves bankrupt, and many more have raised warnings about their financial stability. Yet local audits are increasingly delayed and of poor quality. Public audit is vital for holding these local authorities to account over how they spend public money. Local audit cannot remain an afterthought to the wider audit reform agenda – but once again, today’s proposals seem to completely ignore its specific circumstances.”

Michael Marchant and Mamello Mosiana, South African anti-corruption group Open Secrets said: “Any failure by UK authorities to significantly reform the auditing profession will have a global impact. The slower London is to reform, the more harm is committed across the globe by multinational audit firms that have been complicit in massive corruption scandals and state capture in countries like South Africa. We have seen the consequence of audit failure by many UK and US headquartered auditing firms – millions of people have been driven deeper into poverty. This is not an academic debate, fundamental reform of the UK law is urgent and necessary.”

The nine organisations and academics warning that the UK government’s audit proposals do not go far enough are: Open Secrets, Research for Action, Corporate Accountability Network, ClientEarth, Greenpeace, the Fair Tax Foundation, Professor Richard Murphy, Professor Adam Leaver, and Professor Atul K Shah.

* Read details of the Government’s reform proposals here.

* Source: Greenpeace UK