We are submitting to the Government’s open consultation on restoring trust and audit in corporate governance.
At Sarasin & Partners, we have long sought reforms, and our work with other investors has helped to catalyse reviews into how the audit system functions.
Ultimately, we believe legitimate audits need to sound the alarm where companies are at risk of mis-representing their financial position. Above all, investors and the public need to know if the business has a sound capital foundation, and will thus be more resilient to anticipated headwinds. The accounting and audit system should prevent companies from hiding bad news that could put solvency at risk.
Climate change brings the importance of audit reform into sharp focus; the longer we delay recognising likely losses and liabilities associated with a pivot onto a net zero pathway, the slower we will take action. This will not only harm shareholders and creditors but the public will suffer the consequences.
The actions proposed by the Government move us in the right direction but do not go far enough. Alongside steps proposed, we call on BEIS to:
- Ensure a full and independent review of the legal requirements for ‘true and fair’ accounts, including linkages to capital protection rules and going concern. Accounts should not be leaving out likely losses and liabilities, even if they are expected after two years.
- Ensure full enforcement of requirements for companies and groups to track and publish their ‘distributable reserves’ to prevent directors paying our dividends that put businesses at risk of failure.
- Require directors to stress test companies’ accounts for material risks associated with moving onto a sustainable net zero pathway, and for auditors to call out where directors fail to do this
The Government is proposing to move forward on numerous fronts in its White Paper. It is vital the Government doesn’t miss the wood for the trees. Fixing all the mechanical faults will not do any good if the car is driving in the wrong direction. We, therefore, ask that the Government focus on the question that matters most: how to ensure our accounting and audit system underpins long-term and sustainable businesses to deliver for the public interest.