The UK business secretary announced on Thursday a consultation period for a slate of audit and corporate governance proposals.
Kwasi Kwarteng, MP, Secretary of State at the Department of Business, Energy and Industrial Strategy (BEIS), unveiled the proposals and opened a consultation that will run for 16 weeks ending 8 July. Based on the outcomes of the consultation, the government will draft primary legislation “to take forward the proposed reforms when parliamentary time allows”, the department said in a press release.
The proposals include:
- A new regulator, the Audit, Reporting and Governance Authority (ARGA), which would oversee the largest unlisted companies as well as those on the stock market. The regulator would also have the power to impose an operational split between the audit and nonaudit functions of accountancy firms. ARGA’s objectives, governance, and funding would be underpinned by legislation. ARGA would be the successor body to the current Financial Reporting Council (FRC).
- New reporting obligations would be introduced on both auditors and directors around detecting and preventing fraud, with boards required to set out what controls they have in place.
- A voluntary scheme that would allow for the audit and assurance of more nonfinancial information over and above the statutory audit, including against key climate targets.
- An effort to grow the capacity and capability of challenger audit firms by giving the new regulator the authority to operate a managed shared audit regime in which a subsidiary company audit is done solely by a challenger firm and, subsequently if needed, a managed market share cap, reserving a proportion of listed company audits for challenger firms.
- Establishing new powers for the regulator to set and enforce standards for FTSE 350 companies’ audit committees; and new powers to monitor the resilience of the largest audit firms, together with improved powers to monitor the broader audit market.
- Expanding the definition of “Public Interest Entity” (PIE) to include some very large nonlisted companies, which would have to meet more stringent reporting and audit requirements. The government will also consider an option to exempt newly listed firms from requirements associated with becoming a PIE, to ensure the UK is competitive as a home for new listings.
- Potential fines or suspensions for directors of large businesses as a result of significant errors with accounts, hiding crucial information from auditors, or leaving the door open to fraud.
- Potential expectations under the UK’s Corporate Governance Code that directors’ bonuses would be repaid in the event of collapses or serious director failings up to two years after the pay award is made.
- Increased transparency about the financial health of large businesses. Directors would publish annual “resilience statements” that set out how their organisation is mitigating short- and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change.
The consultation incorporates many recommendations made by three independent reviews conducted in recent years in the areas of auditing and corporate reporting: the independent review of the FRC, led by Sir John Kingman; the independent review of the quality and effectiveness of audit, led by Sir Donald Brydon; and the Competition and Markets Authority’s statutory audit services market study.
The proposals are a part of the UK government’s wider business and finance regulatory work including the Hill Review on listings and Kalifa Review on fintech, as well as the Plan for Growth, which sets out how infrastructure, skills, and innovation will help drive the UK economy.
CIMA will respond to the consultation.
— Kim Nilsen (Kim.Nilsen@aicpa-cima.com) is FM magazine’s publisher.