A major reform agenda could be upon us in the first quarter of 2021, writes Michael Izza
At the time of writing, we are expecting the consolidating consultation paper on corporate governance and audit reform to be published – finally – before Christmas. This consultation has been promised in various guises on multiple occasions, but it has failed to materialise.
While we all understand how much ministerial capacity the pandemic has taken up, a government should be able to manage other important activities at the same time.
Since December 2019, when Sir Donald Brydon’s report came out, the narrative around the reform agenda set by him, Sir John Kingman and the Competition and Markets Authority (CMA) has evolved and matured. It is increasingly talked about in terms of governance as opposed to audit specifically, recognising that audit is merely one part of the financial reporting framework and governance within the organisation.
We will be looking for reassurance that the time has been used to plan the transition from the Financial Reporting Council (FRC) to the Audit, Reporting and Governance Authority (ARGA) carefully, so that consultations relating to those actions that fall to the new regulator are not pulling in opposite directions. We would expect ARGA’s role and responsibility within the corporate governance ecosystem to have received careful consideration, particularly where it interacts with other regulators, to ensure that its powers are clear, proportionate and effective.
Coming from Kingman, we expect the government to propose strengthening the UK internal controls regime, alongside implementation of the proposed power to hold boards and directors to account. Extending the definition and scope of public interest entities is another likely move, although one, I hope, that will not prove too arduous for those companies, particularly given the likely recovery time needed from the pandemic.
The CMA proposals on separation of firms’ audit arms have already been taken forward on a voluntary basis. We expect to see the government suggest the concept of managed, shared audits, perhaps for large businesses, but more clarity is needed.
Finally, we expect consultation on Brydon’s suggestions to be more discursive and green.
Launching the consultation now presents the prospect of a major reform agenda coming potentially in the first quarter of 2021, a time when certainly in the UK many companies with December year-ends will be preoccupied. It’s not clear that there will have been any easing in trading conditions for many British businesses by then. Will they have any bandwidth left to spend the necessary time on this important area?
It is essential for the future standing of the UK markets that we get the changes right. The global profession is watching with interest what is happening here. I would welcome your views on this consultation – when it’s finally published.