The resignation of John Glen, Britain’s city minister, this week in protest to Prime Minister Boris Johnson, has rocked the financial world. His departure from office comes days before he was due to unveil proposed reforms to reset a post-Brexit financial service industry. Glen, who has held his post as economic secretary to the Treasury since 2018, stated he could no longer stay in post because of his “complete lack of confidence” in Boris Johnson as Prime Minister.

Glen said the planned bill would bring a new era of financial services to Britain including reform on insurance, capital markets, cryptocurrency, and rewriting the rulebook on the objective of financial regulators post Brexit. Yet following his resignation there is doubt surrounding the pace at which this reform will come to fruition.

This government shake up is also likely to affect the government’s plans to reform the way corporate governance and audits are carried out. This follows the collapses of major companies including Thomas Cook in 2019, BHS in 2016 and Carillion in 2018, forcing the government to take action in creating a new watchdog – the Audit, Reporting and Governance Authority (ARGA), replacing the Financial Reporting Council. The new watchdog will be given tougher enforcement powers and be funded by an industry levy. The government said the new developments will ‘help prevent sudden large-scale collapses like Carillion and BHS, which hurt countless small businesses and led to job losses’.

Despite these companies’ accounts being signed off by one of the ‘Big Four’ (KMPG, PWC, Deloitte and EY) they failed, costing over 20,000 jobs and generating over £25 million fines for the auditors. The government is hoping to break up the dominance of the Big Four by forcing companies listed on the FTSE 100 and FTSE 250 to assign part of their audits to smaller firms. ARGA will also have the ability to investigate and fine directors of large companies if they breach their duties around corporate reporting and audits. Chris Biggs, founder and CEO of leading accounting and consultancy company, Theta Global Advisors, welcomes these changes, stating that the independence of an audit cannot be jeopardised because of lucrative consultancy services provided to the same client.

Biggs, who had over ten years experience as a Director of a Big Four firm, emphasises the importance of having shared audits between the Big Four and smaller companies as one way to seamlessly diversify the sector. Despite being generally well-received, the new developments have faced some criticism with some experts labelling it as a ‘missed opportunity’ to introduce stricter rules.

Chris Biggs, Founder of Theta Global Advisors discusses the new auditing rules:

“After three years of consultations, the resignations of key government figures are worrying as this may slow the pace of the crucial audit reform Britain needs, especially after seeing a number of scandals in which thousands of jobs were lost. The introduction of ARGA as an upgrade to the Financial Reporting Council is critical for it to perform its function as a watchdog for the Big Four.

“There are potential issues around this shake up, but that is no reason to shy away from much needed reform. Possible increased costs and time delays for firms outside of the Big Four performing particularly complex and demanding audits are in some ways to be expected because of shared audits. However, these risks can be managed and mitigated with appropriate structures to facilitate a growth period as these smaller firms gain more experience and resources when working on such projects.

“There have been three independent reviews so far and major failings are still happening with the Big Four’s current monopoly. The legislative reform has certainly re-energised the push, but we need to now see more follow through if the issues are to be solved effectively and for the long-term.

“Independence of the Big Four’s audit and consultancy services is crucial. We cannot risk jeopardising the independence of the audit because of lucrative consultancy services provided to the same client. Almost as important as this is the issue of ‘perception’, the public must have the perception that the audit role is fully independent and impartial at all times, otherwise they will lose confidence in the market.

“At Theta Global Advisors, we do not audit and hence, we are one of the few truly independent accounting advisory firms for non-audit services. Mid-sized firms such as ours that are disrupting the industry in a truly unprecedented manner are seeing great success having worked on major accounts this year. Shared audits working with the Big Four is just one way we can seamlessly diversify the sector, with mid-sized firms having shown they can take on previously inaccessible large clients throughout the pandemic. For London to continue as a top choice globally for professional services, it is essential to stay ahead of the curb moving forwards, be that through shared audits or caps on the Big Four’s current monopoly.”