The U.K. government last week confirmed plans to shake up the audit market and improve corporate governance for the country’s biggest companies.
- The Financial Reporting Council (FRC) will be replaced by the Audit, Reporting and Governance Authority (ARGA), which will have tougher enforcement powers and be funded by a levy on industry.
- ARGA will have statutory powers to oversee the professional bodies’ regulation of the accountancy profession; the power to ban failing auditors from reviewing large companies’ accounts; and the ability to direct companies to restate their accounts without going to court.
- ARGA will have the power to make big audit firms keep their audit and nonaudit functions operationally separate and enforce a market cap if the state of the market doesn’t improve.
- To break up the dominance of the Big Four, FTSE350 companies will be required to conduct part of their audit with a challenger firm. If necessary, the business secretary will be able to introduce a market share cap.
- Unlisted companies with more than 750 employees and more than 750 million pounds (U.S. $937 million) in annual turnover—termed as “public interest entities”—will come under scope of the regulator for the first time.
- Directors of large, listed companies will be expected to state whether their internal controls are effective under the Corporate Governance Code.
- Directors of large companies who breach their legal duties to be open with auditors or lie about the state of their firm’s finances will face sanctions such as fines.
- The government will clamp down on “rewards for failure,” where executives receive bonuses despite poor performance and even corporate collapse. The FRC will consult on amending the Corporate Governance Code to increase transparency around bonus clawbacks.
- Large businesses must be more transparent about their profits and losses. They also must provide more information to investors and the public about what they have done to prevent fraud, which company metrics have been independently checked, and what risks the company faces.
Minister for Corporate Responsibility Lord Callanan stated, “Collapses like Carillion have made it clear that audit needs to improve, and these reforms will ensure the U.K. sets a global standard.
Additionally, the government announced it will review wider reporting burdens on large and small businesses, including those from retained European Union law, “to regulate in a more proportionate and agile way that works for British businesses.”
Response to the plans—which do not have a clear timeline to be made law—has been mixed.
Matthew Fell, chief policy director at business lobby group the Confederation of British Industry, stated the reforms “strike a sensible balance between tightening regulation and maintaining the U.K.’s attractiveness as a place to invest and do business.”
Accounting bodies, who will see their powers to regulate the profession transferred to ARGA, are less impressed. Michael Izza, chief executive at the Institute of Chartered Accountants in England and Wales, commented, “[T]he government’s approach has a half-hearted and lopsided feel to it.” He complained the wait for ARGA to be operational—April 2024 at the earliest—was too long.
The Institute of Directors broadly welcomed the reforms—though with some strong caveats. Roger Barker, director of policy and governance, remarked the organization “remain(ed) skeptical” about the benefits of shared audits and said it would have preferred an emphasis on decision-making favoring stakeholders “rather than prioritizing the interests of shareholders.”
Sir Jon Thompson, CEO of the FRC, stated the government’s decision to not make directors liable for signing off on companies’ internal controls—like in the United States under Sarbanes-Oxley—was a “missed opportunity.”