ICAS' open letter to the incoming Prime Minister on audit reform, sustainability and tax
Dear Prime Minister,
As the first professional accountancy body in the world, the Institute of Chartered Accountants of Scotland (ICAS) has always strived to advocate for an ethical and robust finance and accountancy profession. Today, I am writing to urge you to act at pace on audit reform, sustainability and tax, to rebuild trust, address the dual climate and cost of living crises, and keep the UK at the forefront of global business.
Audit and corporate governance reform
In May, ICAS welcomed the publication of the Government’s feedback paper to its 2021 ‘Restoring trust in audit and corporate governance’ white paper. The Government must now take forward its announced package of audit and wider corporate governance reforms expeditiously. Corporate failures cannot be eradicated but failure to act now will result in more corporate scandals in the future, more job losses and a bigger bill in the longer term for the Treasury and taxpayers.
From the outset of the calls for audit reform, ICAS has called for a holistic review of corporate governance, corporate reporting and audit (“the corporate ecosystem”). We therefore welcome the Government’s package of reforms, but it needs to be taken forward at pace. We all want a regulatory environment which not only protects the interests of investors and the wider public interest, but also ensures the United Kingdom provides global business with a regulatory environment that is proportionate and respected. Investors value strong governance. We believe that the package of reforms can help ensure this, so why delay any further.
More than four years have elapsed since the Government asked Sir John Kingman to lead a review to look at the role and function of the Financial Reporting Council (FRC), its impact, effectiveness, and powers. Subsequent reviews of the audit market by the Competition and Markets Authority (CMA) and on the quality and effectiveness of audit by Sir Donald Brydon were launched with much fanfare.
It is essential that the Government’s stated intentions, which will result in holistic reforms to the UK’s corporate ecosystem, are now taken forward at pace, as there has already been too much time spent deliberating. The necessary legislation needs to be drafted and enacted to provide the foundation for the corporate governance, corporate reporting and audit reforms that are essential to ensuring that the UK’s corporate regulatory framework remains fit for purpose in the 21st century.
Companies need to be honest. And in the era of the climate crisis, they need to be honest about their green credentials. To be sure that what they say about their credentials can be trusted we need to be able to measure and report on them to a globally agreed standard. Equally, investors and other stakeholders will need certainty that those providing assurance on such reports meet certain criteria and are acting in the public interest. We don’t have any of that yet, but we need it quickly to help to ensure that organisations actually deliver on their expressed sustainability goals.
The truth is that today reported sustainability information has varying levels of credibility. Even where companies are operating in the same sector and the same country, we can’t be sure that they are reporting on a comparable basis. The danger is that this may lead to ‘greenwashing’, where an organisation exaggerates its green credentials and sustainability footprint. Equally, a company may omit to report information that might adversely impact how it is perceived by stakeholders. That is a problem for all of us and we need urgent action to deal with it.
The accountancy profession has a vital role to play in helping to save the world from the climate crisis. By reporting with reference to an agreed set of high-quality international sustainability standards, we can provide a consistent and comparable measurement of organisations’ impact on the natural world and the tools that they need to reduce their carbon footprint.
We have recently seen the first two draft proposed international standards for businesses to report on sustainability, including climate change. That is an important first step towards corporate transparency on environmental and other sustainability issues, but not enough. These standards will only be about the impact of climate change on businesses, when what we urgently need, in addition, are agreed standards to measure the impact on climate change of businesses. We need both, and we need them quickly, because the planet won’t wait.
Effective collaboration between the International Sustainability Standards Board (ISSB) and the Global Reporting Initiative (GRI) could deliver a set of international standards that will satisfy investor needs and public appetite to gauge the environmental performance of organisations. Agreement on the standards is the first step, but then we will need government support to make their use mandatory.
Additionally, such reporting will be enhanced where external assurance has been obtained from an independent professional who is subject to high quality, performance, quality management and ethical and independence standards. Establishing a level playing field where all actors in the assurance space play by the same rules will help to prevent ‘greenwashing’. Now we need government support to make it happen.
In summary, the UK should take the lead to adopt appropriate standards and put in place effective enforcement procedures. That will encourage other countries to do the same. This will include the Government quickly putting in place legal mechanisms to enforce high quality international sustainability reporting standards in the UK. This is a key part of the UK reaching its net zero commitments by 2050.
Good tax administration is essential to providing a business-friendly environment and in supporting voluntary tax compliance. If businesses and individuals do not trust the tax system because it does not function properly, voluntary compliance is undermined, with serious consequences for government revenues.
HMRC needs adequate resources to perform its tax functions, including delivering user-friendly systems that help taxpayers to meet their tax obligations. In recent years it has taken on a role in areas beyond ‘pure’ tax – for example student loans, minimum wage enforcement and Covid support – but its resources have not kept up. This has had an adverse impact on its core role of administering the tax system, even in ‘normal’ times.
During the pandemic, there were significant problems with HMRC service levels – worryingly, these problems with poor service continue and need to be fixed. As the cost of living crisis develops, it will be important, for example, that HMRC consistently makes repayments due to individuals and businesses promptly.
We are broadly supportive of the government’s 10 year strategy (published in July 2020) for creating a tax system ‘fit for the challenges and opportunities of the 21st century’, but there is a pressing need to address poor HMRC service levels and patchy digital systems that are causing ongoing issues for taxpayers. It is vital that the government ensures that HMRC has adequate resources to improve, and then to maintain, service levels. The emphasis should be on ensuring that basic tax administration works properly for everyone who has to engage with it – even if that means that the next stages of the major Making Tax Digital initiative have to be slowed down.
ICAS would also like to see more transparency from government – and more public discussion – about the role of tax in supporting public services and contributing to the common good. In recent years there has been some government reluctance to increase the main revenue-raising taxes, but governments have still needed to generate revenues; the result has been opaque tax changes and a lack of transparency about revenue raising. This has contributed to increasingly complex and lengthy tax legislation, which makes it harder for taxpayers (particularly unrepresented ones) to understand and comply with their tax obligations. Complex underlying tax law is also reflected in systems which are not easy to use and do not facilitate compliance. Alongside greater transparency about tax, we would also like to see more government action on tax simplification.
With action on these issues, we will build a more sustainable, ethical and stronger finance profession, to not only support the UK’s recovery from the pandemic, but also ensure we leave a positive legacy for future generations.
Bruce Cartwright CA
CEO of the Institute of Chartered Accountants of Scotland (ICAS)