The UK government has issued a far-reaching consultation into corporate governance and audit reform, in response to the Brydon, Kingman and Competition and Market Authority reviews. The consultation addresses almost all recommendations in those reviews, proposing sweeping reforms to corporate governance, audit standards and competition.
The paper outlines new measures to enable the regulator to better hold company directors to account. Directors of large businesses could face fines or even suspensions in the most serious cases of failings, such as hiding crucial information from auditors or failing to keep ‘proper’ accounting records. The consultation examines how these duties should be defined.
Under the UK’s Corporate Governance Code, companies could be expected to write into directors’ contracts that their bonuses will be repaid in the event of collapses or serious director failings, up to two years after the pay award is made.
Proposals for greater transparency from large businesses regarding the state of their finances are also included to address pay-outs of dividends and bonuses when a business is facing insolvency.
Directors would also publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks. This, the consultation argues, encourages directors to focus on the long-term success of the company and consider key issues. Those could include the impact of climate change.
Audit market reforms
Under the proposals, large companies would be required to use smaller ‘challenger’ firms to conduct a meaningful portion of their annual audit, as a way to increase competition in the audit market. A cap on the Big Four’s market share of FTSE 350 audits could be enforced if “the sector does not improve”.
The consultation paper announces the creation of a new regulator, the Audit, Reporting and Governance Authority (ARGA), which would oversee businesses on the stock market and the largest unlisted companies and suggests the government will make ARGA operational as soon as possible. It will have the power to impose an operational split between the audit and non-audit functions of accountancy firms. This is intended to reduce the risk of any conflicts of interest that may affect audit quality.
The new regulator will be backed by legislation, funded by a mandatory levy on industry, and given stronger powers to enforce standards. Where serious problems occur, ARGA would be able to order companies to go back and redo their accounts without having to go through the courts.
New reporting obligations
The consultation paper outlines new reporting obligations on auditors and directors around detecting and preventing fraud. Boards would be required to set out what controls they have in place and auditors would be expected to report on that and outline any problems they found.
Companies will also be able to request that audit extends beyond a company’s financial results to look at wider matters, for example, key climate targets. This wider scope of the audit exercise will be decided by companies in an Audit and Assurance Policy, which they will be required to publish.
Get on with implementation ‘as quickly as possible’
Commenting on the consultation, ICAEW Chief Executive Michael Izza welcomed the government's commitment to reform.
“Modernising corporate governance is a vital part of sustaining public confidence and making Britain the best place in the world to invest and do business,” said Izza. “High-quality audit has a key role to play in that, and this in turn requires a well-regulated and resilient audit sector.
“Once the consultation is completed, we urge ministers to get on with implementation as quickly as possible, with the establishment of the new regulator as the top priority,” continued Izza.
Dr Nigel Sleigh-Johnson, ICAEW’s head of audit, assurance and financial reporting added that ICAEW welcomes the views of all interested parties as the Institute develops its response to the consultation.
“We fully intend to continue to play an important role in assisting government as it finalises its long-awaited proposals for restoring trust in the UK corporate reporting system,” he said.
“ICAEW is launching a major report on the Audit and Assurance Policy to coincide with the BEIS consultation. A programme of activity around our recent Audit Manifesto is also planned in response to the consultation”.
The document contains 98 questions for response, and the closing date for submissions is 8 July 2021. ICAEW will be engaging with members working in firms of all sizes, and across all sectors and regions of the UK, in responding to this consultation.
Read the full consultation document, ‘Restoring trust in audit and corporate governance’
Following the White Paper’s publication, Michael Izza will be in Conversation with Sir Jon Thompson of the FRC on the future of governance and audit reform, next Thursday 25th March at 9:30am.
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