As 2018 draws to a close, the corporate governance landscape continues to change rapidly. Ten years on from the collapse of Lehman Brothers and following more recent high-profile corporate scandals involving the demise of BHS and Carillion, policy-makers and the public are quite rightly demanding a stronger corporate governance framework that delivers greater transparency and accountability. Further reform to achieve this goal is now necessary if we are to restore trust and confidence in not only the financial services sector, but the business world more widely. As part of this change we must ensure that internal audit continues to enhance its role as a cornerstone of good corporate governance.
In 2019 the pace of change will gather further momentum with a number of significant corporate governance upgrades. First, in January the revised UK Corporate Governance Code will come into force. Thanks to the advocacy work of the institute it will include greater recognition of, and focus on, the role of internal audit in promoting good corporate governance for premium-listed companies. This represents a key milestone for internal audit as the profession is increasingly recognised for the vital role it plays in promoting good corporate governance, ensuring the long-term sustainability of our major companies and thereby promoting the public interest.
But policy-makers are beginning to demand not just stronger corporate governance for publicly listed firms, but for privately owned companies too – after all, when BHS collapsed it was privately owned (unlike Carillion, which was publicly listed).
New legislation passed this year requires private companies with more than 2,000 employees, or a turnover of more than £200m, to state whether and how they follow a code of corporate governance. This is why the Financial Reporting Council (FRC) appointed James Wates to chair an industry group responsible for coming up with a corporate governance code for private firms. A draft of the code, known as “The Wates Corporate Governance Principles for Large Private Companies”, went through a consultation process over the summer.
Just as the institute proactively advocated for recognition of the importance of professional internal audit in the new UK Corporate Governance Code, we have been advocating for similar recognition in this new code. In addition, we are pressing for a range of other measures to ensure that large private companies have corporate governance standards comparable to those of publicly listed companies.
Meanwhile, the FRC itself has faced questions about whether it is fit for purpose. The collapse of Carillion, and the joint select committee inquiry that followed this, coincided with louder calls for radical change. The government responded by appointing Sir John Kingman to lead an independent review, during which a range of stakeholders, including the institute, advocated a package of reforms to ensure that the audit regulator’s remit is far more focused, that it adopts a more proactive approach and that it has the teeth it needs to do its job properly.
We don’t yet know the contents of Kingman’s final report, or the specific recommendations he will make, but what we can say for sure is that major reform is almost certainly on the cards in the year ahead. We believe it is fundamental that, if we are to avoid more Carillions in the future, any reforms adopted by the government must deliver an audit regulator that is best in class for corporate governance. We will continue to press for that.
The past year has been an exciting time for internal audit and for the institute as we continue to increase our profile and influence in the corporate governance arena. But with further change now on the horizon, the coming year is shaping up to be just as exciting, if not more so, than the last. We foresee significant opportunities to ensure our voice is heard, help shape the future of corporate governance and further enhance the role of professional internal audit.
We stand ready to rise to the challenge and seize the opportunities that lie ahead in 2019. We look forward to working with you.
This article was first published in November 2018.