Proponents suggest that the current regulatory framework is overly complex, expensive and stifles innovation and business growth.
While there is merit in considering ways to streamline regulatory processes, the idea of significantly reducing audit oversight fails to recognise the crucial role that audits play in ensuring market integrity, economic stability and investor trust.
Weakening these protections could lead to severe and far-reaching consequences.
Audit regulation serves as the bedrock of financial transparency and accountability. At its core, auditing enables investors, regulators, creditors and other stakeholders to evaluate the financial health of a business with confidence.
Robust audit frameworks act as safeguards against financial misrepresentation and deception. If audit standards are relaxed, there is a real risk that companies could engage in “creative accounting”, distorting their financial statements to present a healthier picture than reality.
Such practices undermine trust in the market, mislead investors and can create ripple effects throughout the economy.
History offers clear evidence of the dangers posed by inadequate audit regulation.
The collapse of Texas energy giant Enron in the early 2000s and the global financial crisis of 2007–2008 both revealed the devastating consequences of financial mismanagement left unchecked by auditors.
These events shook investor confidence, led to sweeping regulatory reforms (such as the Sarbanes-Oxley Act in the United States, which forced CEOs and CFOs to personally vouch for the accuracy of accounts) and highlighted the importance of rigorous oversight.
Cutting corners in regulatory frameworks can expose economies to systemic risk.
The lessons from these crises remain highly relevant today. They serve as a stark reminder that cutting corners in regulatory frameworks can expose economies to systemic risk and create an environment in which financial scandals become more likely.
Critics of audit regulation often point to the financial and administrative burden that compliance imposes on businesses, particularly small and medium-sized enterprises.
While regulatory compliance does carry costs, in my opinion these are frequently exaggerated. More importantly, they pale in comparison to the economic costs associated with regulatory failure.
Corporate collapses, fraud and accounting scandals can destroy shareholder value, damage reputations, lead to costly litigation and, in some cases, result in job losses and government bailouts.
Even this week, one of the Big Four, EY, stands accused of “fundamentally flawed” auditing that allegedly allowed a major fraud against its business by principal shareholders to go undetected for more than seven years, as a multibillion-pound trial began in London.
Viewed in this light, strong audit regulation is not a cost to be avoided, but an essential investment in financial stability.
Audit regulation also plays a pivotal role in maintaining the independence, objectivity and professionalism of the audit profession.
Strong regulatory frameworks, when implemented correctly, protect auditors from undue influence by corporate clients and uphold the quality and credibility of audit reports.
A resilient financial system depends on strong, independent audit practices.
If these standards are eroded, there is a danger of a “race to the bottom,” where audit firms may feel pressured to downplay financial irregularities in order to retain business, compromising the reliability of their assessments.
In an era of increasing financial complexity, advanced financial products and emerging technologies such as blockchain and crypto, robust audit regulation has never been more critical: it provides the necessary oversight to identify and respond to new risks, including cybercrime and market manipulation.
Ultimately, while regulatory reform should aim to improve efficiency, any significant cuts to audit regulation would be short-sighted and potentially damaging. A resilient financial system depends on strong, independent audit practices – now more than ever – and this is why I ultimately believe cuts to the audit regulation could be ill-judged.
Harley Thomas is a forensic accountant and senior investigator at MKS Law, a BVI litigation practice which specialises in global asset recovery cases.
