29 January 2021
None of us could have imagined a year ago where we would be today as a result of the Covid-19 pandemic. As I write this we are perhaps at one of our gloomiest stages in terms of disease figures and the resulting social restrictions that affect our personal lives and working environments.
Yet there are plenty of reasons for optimism at the start of 2021. Not only do we have a vaccine, but the government is finally shining a light on audit reform.
Whilst there have been many developments in the audit profession over the last 15 years, two things have not changed. What capital markets need to be successful and what the audit profession has always had at its core, which is transparency and the need for reliable and relevant information that investors and stakeholders can depend on.
Since the mid-noughties we have seen a number of well-known companies failing. And this has led to auditors coming under increased scrutiny, rightly or wrongly.
Regulatory pressure on firms to demonstrate quality has increased audit work and, as a result, fees. Changes in investor scrutiny has led to a greater focus on wider corporate reporting, including governance, equality and environmental impact.
Most recently, the FRC’s Revised Ethical Standard has clarified the rules for auditors and the ability to provide non-audit services to audit clients. This means that all firms have an even more important role to play and can be instrumental in improving quality and providing better investor protection. By limiting the instances where an audit provider can offer additional services, the rules mean the auditor is - and is seen to be - independent of the company it is auditing, from the perspective of an objective, reasonable and informed third party, without the risk of any conflict of interest – at a time when trust in company reporting is more important than ever.
It’s now more than a year since the Brydon Report was published. In response, then Business Secretary Alok Sharma mooted change, but then decided it was a bad time to press ahead. His successor, Kwasi Kwarteng has promised to make audit reform one of his “initial priorities” and, as the pandemic lifts, the opportunity may well arise for him to proceed and reinforce the fundamental benefits of an audit.
So we await further movement on audit reform, which will provide more competition within the sector. Crucially, it will enable businesses - and auditors too - to choose with whom they work and find a good match for their approach to the audit. Progress is also expected on the FCA’s post-Brexit stance and how it will ensure the UK remains an attractive centre for global investors.
So how have the markets responded to the potent cocktail of challenges during the last 12 months? The first half of 2020 was sluggish, reflecting a turbulent start to the year with Brexit uncertainty and then Covid. But by September IPO activity had picked up. And Q4 saw a significant increase, the markets having managed to recover from the effects of the first Covid peak in the spring.
In Q4 there were 17 IPOs on the Main Market raising £3.4billion (including a single issuance under the London Shanghai Stock Connect program that raised £155million). This compared to just three IPOs in Q3 that did, however, manage to raise £3.3billion.
On AIM there was a big increase from Q3 to Q4, with 10 IPOs raising £192million in the last quarter and just three in Q3 which raised £76 million.
During the whole of 2020, 40 IPOs were listed in the UK, 25 on the Main Market (including three via the London Shanghai Stock Connect program) and 15 on AIM. These represented a total increase of 11 per cent when compared to listings during 2019. In terms of funds raised, the UK remained third behind the US and Chinese markets.
Technology IPOs accounted for more than 25 per cent of total funds raised last year. We can assume this is largely influenced by Covid. A thriving BioTech sector is benefitting from increasing opportunities in healthcare.
The number of IPOs is expected to grow in 2021, although the current lockdown may result in postponement of some until later in the year.
There are still many unknowns for the year ahead. What will new Brexit regulations mean for businesses? How quickly will the vaccine enable us to return to ‘normal’? Will recent events in the US have a knock-on effect on markets later in the year? But what we know for certain is that change brings opportunity. And opportunity is exciting.