In our view, accounting standards that directors and auditors are implementing are not supportive of long-term capital protection and stewardship. Audits are failing investors and the public primarily because they are not providing vital assurance that the reported capital and performance in companies is prudently calculated (including only realised – not unrealised – profits, and accounting for expected losses). Misleading accounts undermine responsible stewardship and governance of UK businesses and they likely played a central role in recent corporate failures as well as the banking crisis. This is about preventing excessive, imprudent and hidden risk-taking by ensuring proper disclosure of a company’s true (realised) level of profitability and capital strength.
We submitted written evidence to the BEIS Committee’s inquiry into the Future of Audit, in which we outline our views on proposals made by the Kingman Review into the Financial Reporting Council and the Competition and Market Authority’s (CMA’s) study of the audit market. Natasha Landell-Mills, Head of Stewardship, was one of three investor representatives also invited to provide oral evidence to the Committee.
While supporting a number of recommendations made by Kingman and the CMA, we continue to call for implementation of the UK’s capital maintenance legal regime through supplemental financial reporting and government-endorsed guidance on the calculation of distributable profits and reserves. We hope to see this picked up as a key focus for the inquiry.