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Badenoch under pressure to revive sweeping audit reform

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Kemi Badenoch is under pressure from a top City group to revive a sweeping shake-up of audit rules after the government shelved many of its reform plans last year, City A.M. can reveal.

The audit watchdog, the Financial Reporting Council (FRC), revealed long-touted measures to strengthen the standards of audits and reporting for listed companies last year in response to a string of high-profile corporate collapses.

However, the FRC was forced to dramatically prune the plans after ministers omitted a required bill from the King’s Speech last year and told the regulator to focus on growth.

In a letter to Badenoch, seen by City A.M., the Chartered Governance Institute (CGI) has now claimed the failure to push through the reforms in full has “undoubtedly contributed to the persistence of the delisting problem which plagues the London market”.

“The government’s capricious abandonment of the long-planned [reforms] represented a colossal waste of government time and public money, sent a bad signal about this government’s commitment to responsible capitalism, and left business leaders and investors in a state of uncertainty,” the CGI chief Sara Drake wrote in the letter to the business and trade secretary.

“Sudden corporate collapses have a serious impact on suppliers, shareholders and employees as well as inconveniencing customers,” she added.

Among a list of demands, the CGI called for auditing rules to be expanded to cover all large private firms and grant the FRC new powers to investigate and sanction company directors for breaching auditing rules.

Plans to strengthen the country’s audit watchdog were ultimately ditched last year as ministers decided to cut red tape and get city regulators focused on boosting growth. 

“At a strategic level, in fulfilling its core purpose to enhance public trust and confidence in corporate governance, financial reporting and audit, the FRC should contribute to promoting the competitiveness and growth of the UK economy, embedding its growth duty across its work,” Badenoch said in a letter to FRC chief Richard Moriarty in November.

After many of the reform plans were shelved, then City minister Andrew Griffith welcomed the move, arguing it represented a “pragmatic and proportionate” approach

Under the new plans revealed earlier this month by the FRC, which are set to come into force in 2026, directors will have to shoulder responsibility for stronger internal controls, with the regulator expecting firms to carry out a review of their company’s risk management and internal controls at least once a year. 

A Department for Business and Trade spokesperson told City A.M. that “significant reform is already underway”. 

“The Financial Reporting Council is driving up audit quality, and we’ve given it more powers to ban inadequate auditors from reviewing large companies’ accounts. We are working to ensure all reforms cement the UK’s position as one of the best places in the world to do business,” they added.

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