What will audit reform look like under Labour?

Labour, having settled in after winning the 2024 general election, have set their eyes on not only prioritising employment and industrial strategy but also comprehensive audit and corporate governance reforms. Jonathan Reynolds MP, the secretary of state for business and trade, has liaised with the ICAEW in the spring of this year, with the promise of a shift that would bolster the UK’s competitiveness and attractiveness for business. 

With the backdrop of recent accounting scandals, the anticipation for the replacement of the Financial Reporting Council (FRC) with the Audit, Reporting and Governance Authority (ARGA) has been palpable. 

During the campaigning period, Reynolds emphasised that the ARGA would be a key component of any measures introduced by the party. He also expressed an interest in the mutual recognition of professional qualifications, acknowledging the changing international landscape as a significant challenge. 

In discussions with ICAEW’s CEO Alan Vallance and managing director Iain Wright, Reynolds sought feedback on the ease of doing business. Vallance highlighted members’ frustrations, citing one who said, “Setting up a bank account for a small business is almost impossible. You can register a company in 10 minutes, find a client in a week, but it takes three months to open an account.” 

Vallance also pointed out the poor HMRC service standards and issues with VAT registrations as additional hurdles for businesses. In pursuit of a smoother service, he suggested the implementation of a business start-up passport to streamline these processes online.

Reynolds indicated Labour’s intention to speed up banking registration, potentially through technological solutions, while ensuring measures do not increase fraud risks. He expressed Labour’s willingness to hear more about how they could simplify the day-to-day operations for businesses. 

The possibility of reforming Companies House was also mentioned, with Reynolds suggesting that an increase in the administrative fee could fund improvements. That said, Vallance cautioned that any reforms should maintain the ease of registration as the main goal. Likewise, Reynolds conveyed Labour’s cautious approach to committing to actions within the first 100 days of government, aiming to ensure deliverability of promises.

During a Labour Business Network event at Chartered Accountants’ Hall, Reynolds addressed senior business leaders, taking questions and further discussing Labour’s plans. In the run-up to the general election, questions were raised about the future of audit reform. Although not prominently featured in Labour’s manifesto, past statements suggest it could be a significant agenda item.

In light of various accounting scandals and the Sir John Kingman Review, the audit and accountancy sector has been anticipating the replacement of the Financial Reporting Council (FRC) with ARGA. This reform was dropped from the King’s Speech in November 2023 – and with no mention in other political parties’ manifestos – the FRC was preparing for ARGA to potentially launch around 2026 or 2027.

However, Labour’s plans might accelerate this timeline. While not explicitly mentioned in Labour’s manifesto, the party has shown a strong commitment to enhancing the regulatory framework of the audit sector. Reynolds confirmed Labour’s intent to replace the FRC with ARGA, which would require new legislation. He reiterated this priority in a statement to the ICAEW, stressing that ARGA would play a crucial role in Labour’s first-term reforms. 

According to the party, its cautious approach to the first 100 days of government aims to “ensure that the UK remains competitive and attractive for business”.

In contrast, the Conservative Party has supported audit sector reforms to boost business confidence and accountability, but has faced delays and concerns from MPs about balancing robust regulation with avoiding burdens on businesses. 

During a 2023 parliamentary debate on audit reform, MP Mark Pawsey noted: “Time and again, opposition parties seek to wrap businesses up in red tape, whereas Conservatives are keen to cut red tape. 

“Consultation with businesses revealed concerns about imposing additional reporting requirements, while the government is looking to simplify and streamline existing requirements.”

Looking ahead to Labour’s tenure, despite the lack of explicit references in election manifestos, the establishment of ARGA and broader audit reforms are likely to be on the agenda of the next government. Audit reform is crucial for maintaining the integrity and reliability of financial reporting and corporate governance. As the political landscape evolves post-election, it will be important to monitor how these reforms are approached and implemented by the new government.