The UK government confirmed Tuesday a series of changes to be made to the reporting and corporate governance framework and auditing rules.
The announced changes, in the government's response to its consultation on strengthening the UK's audit, corporate reporting, and corporate governance systems, include:
- UK regulator the Financial Reporting Council (FRC) is to be replaced by the Audit, Reporting and Governance Authority (ARGA), which will have tougher enforcement powers and be funded by a mandatory industry levy.
- Unlisted companies with more than 750 employees and with over £750 million annual turnover will additionally come under the scope of the new regulator as public interest entities (PIEs). Currently, PIEs are defined as companies listed on the stock exchange, banks and building societies, and insurance companies. The government intends this 750:750 rule to also apply to companies trading on the Alternative Investment Market (AIM) and to limited liability partnerships (LLPs).
- FTSE 350 companies will be required either to appoint an auditor outside the Big Four audit firms or to allocate a certain portion of their audit to a smaller firm.
The plans build on the recommendations of Sir John Kingman, Sir Donald Brydon, and the Competition and Markets Authority independent reviews.
Andrew Harding, FCMA, CGMA, chief executive–Management Accounting at the Association of International Certified Professional Accountants, representing AICPA & CIMA, said the proposals were "a step in the right direction" and emphasised the need for consistent application by the largest companies of internal controls.
Sir Jon Thompson, the FRC's CEO, questioned the government's decision not to pursue the introduction of a version of the US Sarbanes-Oxley reporting regime. He said this was a missed opportunity "to improve internal controls in a proportionate, UK-specific manner".
New regulatory powers
ARGA, which is expected to be created in 2023–2024, will have additional statutory responsibilities and powers that the FRC does not have. The government explained these include formalised responsibility for overseeing the accounting and actuarial professions, a stronger role in auditor registration, and new powers to investigate and sanction company directors for breach of their duties relating to corporate reporting and audit.
Under government plans, the regulator's powers will be extended to cover the entire contents of the annual report and accounts including reviews of corporate governance statements, directors' remuneration and audit committee reports, and the CEO's and chairman's reports.
— To comment on this article or to suggest an idea for another article, contact Oliver Rowe at Oliver.Rowe@aicpa-cima.com.