The chaotic collapse of Carillion in 2018 prompted near-universal agreement that the quality of audit in the UK, along with audit regulation, required a major and urgent upgrade. This construction and contracting giant's failure laid bare critical weaknesses in the system, yet eight years later, the government has retreated from its promised reforms.
A Feeble Retreat from Overhaul
Ministers have now abandoned their long-promised overhaul of the audit market, opting instead for what critics describe as another "pro-growth" nod. The wait for the "long-awaited" government bill is over, but not because it has been delivered. Rather, the government has given up entirely on introducing a dedicated reform bill.
Blair McDougall, the minister for small business, formally told the business select committee that while the planned reforms would be beneficial, some would increase costs on business. He argued it would not be right to prioritise these over more deregulatory measures. Other explanations offered included insufficient parliamentary time and the claim that "the need for major reform is less pressing than it was."
The Carillion Collapse: A Stark Reminder
Back in 2018, Carillion's chaotic failure served as a brutal reminder that auditing might seem boring until it matters greatly that outsiders can trust published numbers. The collapse of one of the country's largest construction and contracting firms resulted in nearly 3,000 employees losing their jobs.
Since the company was deeply involved in contracts to service schools and hospitals, the government had to spend £150 million to maintain basic services. The shocking detail was that it took just six months from Carillion's first profits warning to complete calamity. At the end, liabilities stood at about £7 billion with cash reserves of just £29 million.
Regulatory Fallout and Inadequate Response
KPMG, as auditor, received a record fine from the audit watchdog, the Financial Reporting Council (FRC), and the fallout continues. Two former Carillion directors were fined by the Financial Conduct Authority as recently as this month. The seriousness of the whole saga prompted calls for a new regulator with stiffer powers and a broader remit, as recommended by City grandee Sir John Kingman in his government-commissioned review.
A white paper was issued in 2021, but a bill never made it onto the legislative agenda of the Brexit-consumed last Tory government. Now it won't appear under Labour either, marking a significant failure of political will across administrations.
The FRC's Limitations and Government Promises
The best that can be said in the government's defence is that the FRC, after a clear-out of old management, has improved its performance in subsequent years. The audit landscape looks less cosy now that the big four accounting firms have separated their audit and advisory arms.
However, the biggest flaw was always the FRC's lack of statutory status to guarantee its annual funding and its powers to summon witnesses. If the FRC is being retained rather than replaced, will it at least be put on statutory footing as a matter of absolute urgency? The government's weak promise is "as soon as parliamentary time allows."
Abandoned Proposals and Growing Risks
There seems to be no intention even to try to resuscitate other elements previously viewed as vital. One was the proposal to bring the largest private companies into a tighter regulatory auditing system. Another was the plan to give the regulator powers to hold to account directors who are not members of accounting bodies.
If the government regards these proposals as inessential pieces of regulatory flummery, it should reconsider. Private companies are growing larger all the time, and the FRC, not just the FCA, should be able to pursue all directors in cases like Carillion.
International Comparisons Highlight UK Inaction
A generation ago, in 2001, the United States had its "Enron moment" with the bankruptcy of a major energy company amid an accounting scandal. Within a year, America had passed the Sarbanes-Oxley Act, which rearmed regulators and created criminal penalties for corporate misreporting.
In contrast, the UK's "Carillion moment" of 2018 has been met with eight years of ineffectual fiddling by successive governments. This will result, at best, in the bare-minimum requirement of statutory powers for the regulator being tacked onto some other financial bill. This approach does not demonstrate the dynamism needed to prevent future corporate failures and protect public trust in financial reporting.
