Effective and fair markets can only operate if they have access to data that is reliable, true and fair. That is why financial markets are utterly dependent on the role of auditors to deliver accounts that genuinely represent the financial operations of the companies that issue them and which seek investment from third parties to enable them to undertake their operations.
The need for reliable data is wider than that, though. We also need it from the government itself, all its agencies, and organisations like universities that have massive macroeconomic impacts in the localities in which they work.
This is what accounting is meant to be all about. It is there to protect the creditor, the consumer, society, and taxation authorities from abuse. Some may think this is boring. I think it is absolutely fundamental to the underpinnings of a fair society.
That is why, with my Sheffield colleague Prof Adam Leaver, I have spent a lot of time writing extensive submissions to the government on the various proposed audit reforms that came out of the Tory government from about 2018 inwards, which were precipitated by very obvious audit failures like Carillion, BHS, Patisserie Valerie, and all those other slightly less spectacular but nonetheless serious events that have resulted in the Big Four accountants paying hundreds of millions in fines to compensate for their inadequate work.
I want better data, better accounting, more responsibility and an extension of the duty of care on the part of those reporting so that everyone can make better decisions. I think that is an entirely reasonable objective. A great many hours have gone into trying to achieve this, and behind the scenes, quite a number of meetings with government officials have taken place.
And then, this morning, the FT has reported:
UK ministers are exploring scrapping promised stricter audit rules for private companies as the government seeks to dial back regulation in a bid to boost economic growth.
Business secretary Jonathan Reynolds and employment minister Justin Madders have met large audit firms and big investors in recent months to discuss watering down or axing reforms that would designate about 600 companies “public interest entities”, according to people familiar with the talks.
The concept of the public interest entity (PIE) is really important. It identifies those entities that are too big to fail (whatever the legality of the situation) and which would impose substantial economic cost on the economy, either nationally or in the locality in which they operate, if they were to do so. They are, in essence, the large movers and players, and it is utterly unreasonable to pretend that these organisations are just microeconomic units, as economic theory and past accounting logic have suggested because they are obviously macroeconomic relevant.
Now, all in the pursuit of mindless growth at cost to the consumer, the investor and society at large, it looks as if Labour is going to abandon this agenda. The Tories wanted to deliver this. Covid waylaid the goal, but they never abandoned it. It looks like Labour will.
My suggestion that Labour is very rapidly trying to look like a government more recklessly irresponsible than that of Liz Truss looks to be justified, yet again.
I am staggered by the abandonment of responsibility that will be implicit in this proposal if it happens.
Has there ever been a government more friendly to business whilst being indifferent to the consequences than this one is seeking to be, at least in the post-war era? I am seriously beginning to doubt it.
Labour is now willing to rat on the interests of all those who need the government to deliver policy to protect people from abuse by those with power, many of whom are working people who are being forced to save in the shares of the companies that will benefit from this lax approach to audit by putting out financial statements that may not present a true and fair view.
I despair.
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Labour have set themselves up to fail. They have nailed their ability to do anything to generating GDP growth. Without GDP growth they think (probably correctly) that they will lose political power. So they are pursuing growth at all costs. (It does not help that the Bank of England’s continuing its high base rate, and various of their own measures such as the impending NIC increase, are undermining that.)
If that means abandoning judicial review, or democratic oversight, or regulation to protect the consumer or the public, then they are willing to do that. Even if they do manage to generate some growth (and like inflation that is not entirely within their control) it will come at a cost and it will be precarious. Like a CEO focusing only on the share price, and their share options and bonus scheme, there may be short term reward but long term failure.
Agreed
The government is all in on the cash-nexus and monetary aggregates. If these aggregates don’t growth and wealth trickles down, then what was the point? They would have sacrificed the party for nothing. They are digging their own grave.
Seeking clarity (for the omnibus conversations).
I got a bit lost at the too big to fail paragraph. 100% clear up to then on audit cockups such as Carillion etc and repeated failings of big audit firms.
I also get the point about macro-economic impact, Carillion going down hit a LOT of people, it was a macro-event.
Are you saying that “too big to fail” means “must therefore be properly, and more strictly audited”?
Or is there something more there, like “must have rescue mechanisms in place” or maybe “both”?
Thanks.
Both
“I am staggered by the abandonment of responsibility that will be implicit in this proposal if it happens.”
I am not even surprised. If you are a neoliberal cult follower, a Labour politician, and find yourself in Government; and you go on repeating the same blunders, with the same results as all the Labour and Conservative governments before; and you have nothing left, and no idea what to do; what do you do?
You do what Britain has always done in the past, before or after a crash that brings on recession or depression or misery for most, but the few; you panic. Then you take a series of really, really stupid, blind, short term, worthless decisions. And call it stability. And promise sunny uplands. It will not last.
We need a red warning for Downing Street. Avoid at all cost.
Thank you and well said, John.
From the spring of 2008, so a few months before Lehman, to the autumn of 2012, I worked at the main City trade body and was involved with initiatives* to get the economy going, e.g. deregulation, alternative sources of funding to banks and what became the British Business Bank. There was also a bit to help developing economies.
John: “If you are a neoliberal cult follower, a Labour politician, and find yourself in Government; and you go on repeating the same blunders, with the same results as all the Labour and Conservative governments before.”
It’s interesting to observe Labour do exactly what the coalition did. It feels like someone, at least at my former employer, dug out the shopping list, related to the above work, and sent it to Whitehall. There’s so much similarity.
*These initiatives were called the task force and an idea from our manager, a junior Treasury minister in the Major government, and designed to head off structural reform and even the break up of banks, then being considered by the Vickers commission.
As my parents and I watched the breakfast news and I explained some goings on at work, including a big shot from HQ refusing to commit new resources to the UK and elaborate when asked what UK sectors the bank should target, I highlighted the disconnect between politics and the media and the experience of vast majority of people here and concluded the situation is terminal.
Expertise is in remarkably short supply in this world.
Colonel, I live in hope that one day you might say something which gives me hope for the future.
Forced smile.
Have a good weekend.
“Scrapping stricter audit rules for private companies” means more fraudulent accounting. More fraud will indeed lead to fraudulent growth, which has nothing real in it. And, as Richard has said many times, many of these companies are already fraudulent, by assuming fossil fuel assets will keep their value as the climate worsens. The top people of this country seem to sink deeper into corruption by the day.
Dusting off my PhD in the bleeding obvious.
If I am in business I need to form an opinion on the reliability of the people I am doing business with.
Auditing in its broadest sense does that
If Auditing isnt sufficiently rigorous than I wont be able to do this
That doesnt help business it hinders it
Signed a non accountant
You are right
But the loss won’t be yet, in Labour’s thinking, so that’s all right then
I find myself wondering… is this advice from senior civil servants, or are Ministers going against the advice they are being given? Neither is a good situation, but how we counter it is very different in the two cases.
I do not think the officials involved in the process are advising against it…
I think that’s the worse of the two options. Deeply worrying if true.
Thank you, Richard and Kim.
I was just chatting with a American friend / former colleague and former secretary to Islington Labour Party. She left the party in disgust within months of Starmer becoming leader and returned to the US, after 25 years, last year.
We think the UK’s comprador class, political and bureaucrat, know the game is up, so they must facilitate looting and favour the firms most likely to look after them. That means, mainly, American.
A bit off topic, but live at “the other place”: https://www.nakedcapitalism.com/2025/01/the-curse-of-the-household-analogy.html (including a comment by Aurelien).
Thanks
Again off topic but more exposure
https://bylinetimes.com/2025/01/24/no-there-has-not-been-an-exodus-of-uk-millionaires-and-new-wealth-taxes-wont-force-them-to-leave-either/
which refers at length to Richard’s Taxing Wealth Report .
Thanks
I had it seen that
I spoke to Kate on Wednesday
‘duty of care’ is of utmost importance in any environment – whether it be via internal or external audit, or regarding management, or in one’s private life – as Richard stated a couple of days ago, we need a world that cares, and this involves duty of care, and even duty to care. Audit is about duty of care and is essential to ensure fair presentation of whatever is being audited and indeed for protection. Audit is not just about fraud, it is about reliability and ‘true and fair’ and to protect and safeguard the investor and the consumer in regards to his or her expectations, and the public in regard to unfair or dishonest practices and their own expections.
Thank you. And much to agree with.
at the basic level , those on state pension: how much are we losing by freezing t tax allowance element of the state pension .2021 =£12570 but according to Bof E inflation calculator it should be over £15k . Take away tax and we are losing every year about £2k?
No, tax is at 20%