ShareSoc and the UK Shareholders Association have submitted this joint response on behalf of individual investors to the House of Commons BEIS Committee enquiry on the future of audit. It is a joint response from UKSA and ShareSoc on behalf of individual investors.
UKSA and ShareSoc represent the interests of private shareholders. In addition to our own members, there are 5 million people who own shares and have investment accounts with platforms in the UK. The Office for National Statistics estimates that individual investors own 12% of the UK stock market by value. In addition to this there are many more who have money invested in shares via funds, pensions and savings products such as employee share ownership schemes.
We made three key points:
- The Siren voices of vested interests arguing for limited change should be dismissed.
- The Quality of audits is the issue which concerns us most. The current approaches are not working. Radical alternatives should be considered.
- Peer Review of FTSE 350 audits by challenger firms would be a particularly good idea, which should improve the quality of audit. The emphasis should be on reviewing the key assumptions, not on duplicating low level admin tasks. 10% of FTSE 350 companies should be nominated for peer review in year 1 and 25% in year 2 of this new policy, starting with effect from year ends 31 March 2019 onwards.
We also draw attention to fundamental causes of the ineffectiveness of the shareholder vote on auditor appointment – namely, the lack of rights to disenfranchised beneficial owners and the failure of those intermediaries who hold those rights (institutional investors and fund managers) to exercise them in effective stewardship. The term “ownerless corporation” was coined at least 20 years ago, and the situation has got steadily worse . The problem has attracted limited attention from policymakers. It suits the financial services sector, a powerful lobbying resource in its own right, to leave things as they are.
Change is now required if audits are to properly fulfil their true purpose and for users of company accounts to have confidence that those accounts really do represent a “true and fair” view of a company’s affairs.