Audit reform bill shelved: What it means for governance and audit quality

In a letter to the House of Commons Business and Trade Committee in January, the Minister for Small Businesses and Economic Transformation Blair McDougall announced that the government was  “reprioritising” its plans for major audit and corporate governance reform.

For some businesses, the pause removes the immediate prospect of increased regulatory burden. For others, it raises a more fundamental question: Has the underlying problem that prompted reform really gone away?

To understand what this means for boards, finance teams and audit committees today, it’s worth revisiting why reform was proposed in the first place – and what organisations should be doing now, regardless of legislative direction.

The roots of audit reform lie in a series of high‑profile corporate collapses, including construction company Carillion, which entered liquidation in January 2018. Its failure sent shockwaves through the UK economy, affecting thousands of jobs, pension holders, suppliers and public sector projects.

As S&W Audit and Assurance Partner Chetan Mistry explains, while the companies made mistakes leading to their failures these were not detected early enough by audits: “Failures in big businesses don’t just affect the company itself, they have wider ramifications for the economy, public services and people’s livelihoods.”

The cases were not isolated incidents but systemic warning signs, Mistry continues. Subsequent investigations into Carillion highlighted serious shortcomings in corporate reporting, governance and audit challenge. In particular, auditors failed to flag material uncertainties over the company’s ability to continue as a going concern, despite mounting debt, weak cash management and significant judgements around work‑in‑progress and goodwill balances.

Alex Adkins, Associate Director for Assurance and Business Services at S&W, points to a critical issue at the heart of the collapse: “The crux of the issue was that no material uncertainty over going concern was identified, despite the business effectively borrowing to survive and carrying balances that weren’t being robustly challenged.”

These failures prompted a series of independent reviews, including the Kingman, Brydon and CMA reviews, all of which concluded that audit quality, competition and accountability needed to improve.

The proposed audit reform bill aimed to tackle these weaknesses on multiple fronts.

First, it sought to strengthen regulatory oversight through the creation of a replacement regulator, ARGA (now proposed to be called the Corporate Reporting Authority), with enhanced enforcement powers. Second, it looked to reduce conflicts of interest by limiting the provision of non‑audit services by audit firms. Third, it aimed to increase competition in a market dominated by the Big Four, including proposals for joint audits on public interest entities (PIEs).

As Mistry notes, the focus was always on quality: “All of this was about improving audit quality – structurally, culturally and in how audits are actually delivered.”

Alongside these discussions, there were also previous proposals to expand the definition of PIEs. These would have brought more large private companies into scope and increase expectations around governance, audit committees and director accountability.

The government’s rationale centres on proportionality and economic growth. In a volatile economic environment, independent bodies such as the QCA have argued that additional regulation could impose unnecessary cost and complexity, particularly for mid‑sized businesses.

Blair McDougall confirmed in his letter the decision not to consult on audit reform legislation, saying it “would not be right to prioritise” measures that increased costs and that the government will instead focus on simplification and modernisation of corporate reporting. This, along with a somewhat ambitious consultation on streamlining the UK’s reporting regime, is to follow this year.

McDougall also pointed to progress in audit quality and regulation since Carillion, suggesting the “need for major reform is less pressing than it was”, while noting an intention to put the FRC on a proper statutory footing “as soon as parliamentary time allows”.

Mistry acknowledges the logic, but also the tension it creates: “There’s a balance to be had. On one hand, the industry has responded positively, and audit quality has improved. On the other, stopping short of full reform risks creating a perception that the job is finished.”

That perception matters. Even if regulation does not formally increase, investors, lenders and boards still expect high standards of governance, scrutiny and transparency.

One of the key questions is whether the weaknesses the bill sought to address have already been sufficiently addressed through other means.

According to Adkins, there has been a marked shift within the profession: “There’s been a renewed focus on professional scepticism, particularly around going concern and accounting estimates.”

Changes to auditing standards, including enhanced requirements under ISA 570 (going concern) and ISA 540 (accounting estimates), have also raised the bar for audit challenge and documentation. And cultural change within firms has played a significant role.

Mistry agrees that quality is now more deeply embedded: “Audit quality has to run through everything – from the most junior team member to the partner. That cultural shift is critical, and it’s not something that disappears just because legislation is paused.”

While the audit bill may be shelved, the broader direction of travel is clear. Expectations around governance, director responsibility and transparency continue to rise – reinforced by legislation such as the Economic Crime and Corporate Transparency Act.

For boards and finance teams, this means complacency is not an option. 

“There’s a risk that some see this as a weakening of standards,” Mistry warns. “The commercial business pressures on boards and management teams to manage compliance costs has always existed, however this downward pressure must not come at the cost of reducing audit quality. The difference now is that scrutiny from investors, regulators and other stakeholders is higher than ever.”

So what should organisations be doing now, particularly when selecting or reviewing their audit partner?

Both Mistry and Adkins emphasise that the focus should shift from brand to behaviour.

Mistry highlights the importance of quality‑led conversations from the outset: “You should be looking at how auditors approach high‑risk and judgemental areas, and whether quality is demonstrably embedded across the whole team – not just at the partner level.”

Adkins adds that robust challenge is non‑negotiable: “If your auditors are spending all their time on transactional testing but not challenging judgemental areas, that’s a red flag. You should expect to be challenged – that’s the value of an audit.”

Other key considerations include:

• Depth of sector understanding and time spent with the business
• Transparency in handling contentious issues
• Investment in training and technical development
• A clear stance on independence and conflicts of interest

While the audit bill may be paused, reform is far from dead. Market expectations, regulatory scrutiny and stakeholder pressure continue to shape behaviour – with or without legislation.

As Mistry puts it: “Ultimately, the impact will be seen in how firms, boards and investors respond. Only time will tell, but audit quality can’t afford to stand still.”

For organisations that take governance seriously, the message is clear: Focus on quality, choose the right partners, and treat audit as a cornerstone of trust – not just a compliance exercise.