Today, the Government has published its Response to the consultation (the White Paper) on strengthening the UK’s audit, corporate reporting and corporate governance systems. Our teams will be reviewing the Response in detail and publishing our views on the impact of the new proposals on directors and auditors in due course. For now, the headline points as regards directors are:
- Companies in scope: The current definition of public interest entities (PIEs) includes entities who have shares admitted trading on a regulated market, credit institutions and insurance undertakings. This includes approximately 2,000 different companies in the UK. The White Paper proposed expanding the definition of PIE to include large private companies whose audit arrangements are a matter of public interest. Having considered the views of consultation respondents, the Government intends to treat large private companies with both 750+ employees and an annual turnover of £750m+ as public PIEs. The effect of this is that only a further 600 companies will fall within scope, as compared to the extra 1000-2000 extra companies that would have fallen within scope under the White Paper proposals.
- Internal controls: Following company failures in recent years where weak internal controls and risk management were identified as failures, it had been proposed in the White Paper that the government adopts a version of the Sarbanes-Oxley rules in the US, a significant piece of legislation requiring top management to individually certify the accuracy of financial information. This proposal has not been accepted and instead the Government intends to strengthen the internal control provisions in the UK Corporate Governance Code to provide for an explicit statement from the board about their view of the effectiveness of the internal control systems (financial, operational and compliance systems) and the basis for that assessment on a comply or explain basis. It is noteworthy that the Code only applies to premium listed entities.
- Stronger regulator: The government has confirmed that the Audit, Reporting and Governance Authority (ARGA) will replace the Financial Reporting Council (FRC) as the statutory regulator, with the necessary powers to investigate and take civil enforcement action for breaches of corporate reporting and audit-related responsibilities by PIE directors. Currently, the FRC is only able to pursue a director if they are a chartered accountant who is subject to the FRC’s Accountancy Scheme. The Response also notes that the Government is considering whether in exceptional circumstances ARGA's powers could also be applied to a non-PIE directors, if doing so was justified by the public interest (for example, if it appears that a large group is structured in such a way as to frustrate proper scrutiny). We will have to see if this is taken forward. However, despite original plans that ARGA would be in place by early 2023, it looks increasingly likely that it will not be established before 2024.