‘UK lead on governance must be preserved’

UK corporate governance

Plans to place corporate governance under the same tough regulatory body as the audit industry put the UK’s global standing at risk, argues the IoD’s interim director general, Edwin Morgan

The perceived shortcomings of auditors in recent high-profile cases of corporate failure have, unsurprisingly, put a target on their industry’s back.

A cottage industry of reviews pertaining to the audit function has sprung up, with as many as seven reports emanating from various sources over the past few months. Chief among these have been the Kingman review of the Financial Reporting Council, the audit sector’s oversight body; the Competition and Markets Authority review; and the Brydon review, which seeks in part to consolidate the findings of the first two.

A key recommendation to have emerged from all this activity – and one that the government seems likely to enact – is the Kingman review’s proposal that the Financial Reporting Council be replaced by an entirely new regulator, snappily entitled the Audit, Reporting and Governance Authority (Arga). This is to be equipped with significantly stronger sanctioning powers. Crucially, the new watchdog will be a statutory body, marking a turning point in the oversight of auditing.

While this approach may be justified when it comes to laying down the law on auditing, Arga is also pegged to be the guardian of the UK Corporate Governance Code. This gives cause for concern. It’s far from clear that the “soft law” regulatory philosophy that has formed the basis of the UK’s approach to governance will be a good fit with this tougher new authority. For instance, the Kingman review stresses that Arga’s board “should not seek to be ‘representative’ of stakeholder interests”. Given that the regulator is set to take a more rigorous and, perhaps, combative stance on audit oversight, Kingman’s logic here is understandable, but this could cut against the grain of the inclusive approach that has helped the UK to set the gold standard for corporate governance.

At a time when this country’s place in the global economy is shifting, it’s more important than ever that we make good upon our competitive advantages. One of these is the high standard of British corporate governance – bolstered by the skills of our directors – with the “comply or explain” principle being imitated across the world. One way in which we might protect this advantage would be to establish a dedicated standalone governance commission, with a high level of involvement from business and wider society. This model is used in several other jurisdictions already, including Germany.

Few would argue that the increased scrutiny being placed on the audit sector is wholly unwarranted. Yet, when it comes to our governance institutions, auditing shouldn’t be the tail that wags the dog.

To contact the IoD’s policy unit, email policy-unit@iod.com

About author

Edwin Morgan

Edwin Morgan

Edwin Morgan is interim director general at the Institute of Directors. His team of policy experts covers issues ranging from tax and regulation to trade and infrastructure.

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