There’s nothing in legislation proposed by the Government to robustly corporate reporting failures or tackle climate and social concerns.

The Government has introduced planned legislation in the Queen’s Speech (p49, Lobby Pack) to tackle how companies report to stakeholders. It is a much needed but very limited response to recent corporate failures.

BHS was placed into administration in 2016 with a pension deficit of £571 million, and 11,000 jobs lost as result.

The collapse of Carillion in 2018 led to the loss of 3,000 jobs at the company, and the collapse affected 75,000 people working in its supply chain. It failed with debts of £7 billion, more than its annual sales of £5.2 billion.

The liquidation of Thomas Cook in 2019 led to the closure of more than 550 retail stores and 9,000 redundancies.

A Government white paper published in March 2021 set out proposals to strengthen the UK’s framework for large companies and the way that they are audited.

The proposed legislation makes no mention of the reserves that a company will need to hold to prevent dramatic failures such as BHS, Carillion, and Thomas Cook. In fact, the Government isn’t proposing any changes whatsoever to existing audit reports.

Instead, it is proposing a new audit watchdog. The Audit, Reporting and Governance Authority will protect and promote the interests of investors, other users of corporate reporting and the wider public interest.

The new regulator will have the power to enforce the financial reporting duties of directors, to supervise corporate reporting, and to oversee and regulate the accountancy and actuarial professions.

When companies fail the Government plans to give Insolvency Practitioners greater powers to prevent asset stripping.

“The mention of audit reform in this Queen’s Speech is doubly disappointing. The proposed scope of change is modest and constitutes a missed opportunity to address wider issues in corporate governance,” said Michael Izza, CEO, Institute of Chartered Accountants in England and Wales.

“This might well end up as the lopsided reform we have consistently warned against.”

There has been consolidation in the audit sector in the last 30 years, falling from eight to four major audit firms. In 2020, every company in the FTSE 100 and nine-in-ten in the FTSE 250 were audited by Deloitte, Ernst & Young, KPMG, and PwC.

The proposed legislation claims that it will break the stranglehold of the major four audit firm and support the growth of challenger firms such as BDO, Grant Thornton, or Mazars. It aims to give businesses greater choice and make the market more resilient, but the briefing note issued along with the speech makes no mention of how it will work.

Companies are vehicles to generate value for shareholders. It’s the legal responsibility of company directors to act in the interests of shareholders first and foremost. They must operate within the legal framework and values of the society in which the company operates.

In this context proposed Audit Reform Bill is a missed opportunity to compel companies to report on environmental, social and governance (ESG) concerns. It makes no commitment to the United Nations Sustainabilty Goals or COP 26 goals to address climate change.

Wadds Inc. is a signatory to the Better Business Act. It calls for reform to Section 172 of the Companies Act to update the duties of directors and align their responsibility to shareholders with their social and environmental impact.