Audit reform not really happening in the UK after all…

We are coming up on 6 years now since the collapse of Carillion.

After this huge audit failure resulting in 3,000 job losses, 30,000 supply chain companies and subcontractors left hanging, and a record fine for one of the Big 4 firms that was deemed to have performed inadequate audits, what has happened?

Three detailed independent reviews totalling 254 pages of recommendations were completed within 2 years of the collapse.

The UK Government has then spent 4 years dithering and diluting these recommendations and ultimately making no statutory changes because changes would be burdensome on businesses.

The regulator has certainly taken steps forward over the past 6 years from when Kingman branded the FRC "toothless" and "chronically passive". The record fine indicates this. For context, KPMG earnt ￡29m in audit fees during its tenure as Carillion's auditor. So, the fine is 72% of the fee income they earned. Some key elements of the reviews have also been advanced by the FRC, such as the operational split of Big 4 firms.

The market has become more competitive. "Challenger" firms have made inroads to the Big 4's dominance. This has in part been achieved by the greater scrutiny of the regulator pressuring Big 4 firms to perform higher-quality audits on listed clients and thus invest more auditor time.

Though the annual firm-by-firm reports do not show a notable step-change in quality inspection results…

With the talent shortage in audit and accounting, part of this competition shift has been driven by Big 4 firms ditching higher-risk and less-profitable audit clients.

But as for the broader reforms recommended by Kingman, Brydon, and the CMA reviews? These will gather dust as another relic of a UK Government that was unable or unwilling to address the big challenges that landed on their desk, such as pervasive audit reform.

When the next large corporate failure inevitably happens and journalists again put auditors under the microscope, can we really say the lessons of Carillion in 2018 have been learned?

Detailed Timeline of Events:

Jan 2018: Carillion collapses after banks refuse to provide further financial support.

Apr 2018: Sir John Kingman commissioned by the UK Government to perform an independent review of the audit regulator, the FRC.

Oct 2018: Competition and Markets Authority (CMA) tasked by the UK Government with performing a market study of the statutory audit market.

Dec 2018: Kingman report published, 95 pages recommending the FRC be replaced by a new regulator, ARGA.

Dec 2018: CMA publish update report on statutory audit market, requesting further input from stakeholders.

Dec 2018: Sir Donald Brydon appointed by the UK Government to lead independent review of quality and effectiveness of UK audit market.

Apr 2019: CMA publish final 21-page report on statutory audit market, including recommendations to improve competition to the Big 4 firms.

Dec 2019: Brydon review published, 138 pages making 64 recommendations, including establishing a new corporate auditing profession.

Jul 2020: FRC tell Big 4 firms to separate audit division from other operations by June 2024.

Mar 2021: UK Government publishes a 232-page white paper "Restoring trust in audit and corporate reporting" and launches a consultation period on the proposals.

Sep 2021: KPMG firm and staff accused of providing FRC "false and misleading" information about Carillion.

May 2022: UK Government publishes a 197-page response to the consultation on the white paper published in March 2021.

Jul 2023: Draft "Companies (Strategic Report and Directors’ Report) (Amendment) Regulations" legislation is laid in Parliament. This legislation is subject to debate and approval by the House of Commons and House of Lords - to come into force in 2025 if approved.

Oct 2023: The legislation is withdrawn by the Government and branded "burdensome", meaning it will not be debated or approved.

Oct 2023: KPMG fined ￡21m and must pay a further ￡5.3m in costs relating to failures over multiple years in the Carillion audit.

Nov 2023: Audit reform fails to make the Kings Speech kicking off the next parliamentary term. FRC announces half of the proposed measures will be ditched, and other governance overhaul will be watered down as a result.