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Proposals strengthen big business assurance and resilience claims

Author: ICAEW Insights

Published: 20 Jul 2023

Long-awaited audit and corporate governance proposals are put forward by government, but missing elements of the reform jigsaw – including ARGA establishment and PIE definition – still needed, ICAEW warns.

Tougher rules to force companies to demonstrate that they can afford dividends and other payouts have been put forward by the government, in a move described as drawing lessons from major and sudden corporate failures such as the collapse of Carillion more than five years ago. 

The Department for Business and Trade (DBT) said the draft rules, announced on Wednesday, are expected to come into force at the start of 2025 and apply to companies with at least 750 employees and annual turnover of £750m or more.

The proposals for four new reporting requirements for very large companies were consulted on in the 2021 White Paper on ‘Restoring Trust in Audit and Corporate Governance’, and then confirmed with some adaptations in the 2022 Government Response to the White Paper consultation. They include:

  • a Resilience Statement, in which companies will set out how they are managing significant risk, and building or maintaining resilience, over the short, medium and long term;
  • disclosure of profits available for distribution and the company’s policy towards dividends and other distributions (eg, share buybacks), including the risks relevant to sustaining the policy; 
  • a statement on actions being taken by directors to prevent or detect ‘material fraud’, on a scale likely to be of interest to shareholders; and
  • an Audit and Assurance Policy, in which companies set out their plans going forward for assuring the reliability of non-financial reporting including on risk, strategy, governance and climate transition planning, which is not assured by the statutory audit of the accounts.

Carillion’s collapse was sudden and from a publicly-stated position of strength. A parliamentary report in May 2018 said Carillion’s accounts published 10 months before the company’s collapse presented a “rosy picture”, enabling it to pay a record dividend of £79m and award large performance bonuses to executives. The company went into liquidation in January 2018 with liabilities of nearly £7bn and just £29m in cash.

Michael Izza, ICAEW Chief Executive, says: “We’re encouraged to see this step towards long-awaited reform of the UK’s audit and corporate governance regime. We’ve been a strong supporter of the audit and assurance policy in particular, believing it to have the potential to transform understanding of a company’s assurance plans.

“While we’re pleased to finally see progress, this draft legislation and the Financial Reporting Council’s (FRC’s) current consultation on the UK Corporate Governance Code are only two pieces of the audit and corporate governance reform jigsaw. For effective reform, the Auditing, Reporting and Governance Authority must be established without further delay, alongside clarity on which entities will meet the future definition of a Public Interest Entity.”

The new measures form part of the government’s wider audit and corporate governance reform plans, as consulted on through the March 2021 White Paper on ‘Restoring Trust in Audit and Corporate Governance’ and finalised in the government’s May 2022 response to that White Paper consultation.

Mark Babington, Executive Director of Regulatory Standards at the FRC, said the publication of the draft rules demonstrates the government’s continued commitment to audit and corporate governance reform. 

“These enhanced reporting requirements will strengthen transparency and accountability in business by providing key information to investors and other stakeholders. The new Resilience Statement, in particular, will give valuable insight into how companies are building resilience amid current economic challenges. We at the FRC welcome these steps to boost the quality of corporate reporting and enhance the UK’s reputation for high reporting standards,” he said. 

The FRC plans to consult separately on detailed non-statutory guidance to companies about good practice in complying with the new reporting statements required by the regulations. It is expected to publish draft guidance for consultation on its website by early 2024.

The Companies Act currently requires only that companies provide “a description of the principal risks and uncertainties facing the company”, but without requiring information on how such risks and uncertainties are being addressed and mitigated, their likelihood and potential impact, the time period over which they are expected to last, and companies’ underpinning governance processes for risk management and developing business resilience.

Under the proposed new rules, an audit and assurance policy statement in the directors’ report, completed every three years, will include a description of the company’s internal audit and assurance capabilities, and itsplans for obtaining internal assurance over information in the company’s annual accounts and reports, an explanation of whether the company plans any external assurance of any information in its annual accounts and reports, and an annual update covering how the audit and assurance policy has been implemented in the year.

The Draft Companies (Strategic Report and Director Report) (Amendment) Regulations 2023 are subject to the affirmative procedure, meaning that they must be debated in Parliament and approved. Debates in the House of Commons and House of Lords are expected to take place in the autumn and if approved by Parliament, the Regulations will come into force on 1 January 2025.

Dr Nigel Sleigh-Johnson, ICAEW Director, Audit and Corporate Reporting, says: “We will be studying the detail of the requirements in the coming days and weeks and will produce resources to support members with implementation. We also encourage DBT and the FRC to provide application guidance, well ahead of the effective date of the regulations to allow time for in-scope companies to prepare effectively.”

“We have engaged with DBT to provide technical input into the development of this draft legislation and continue to stand ready to contribute,” he added.

In June 2023, ICAEW’s Audit and Assurance Faculty published an update to its report, Developing a meaningful audit and assurance policy, whichincludes nine recommendations that companies can use to guide them if the policy is to meet its full potential. 

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