The Government has launched major new reforms of the UK’s audit regime to help restore both business confidence and people’s confidence in business as we rebuild our economy after the pandemic to safeguard jobs, avoid company failures and reinforce the UK’s reputation as a world-leading destination for investment.
The UK is consistently placed as one of the leading destinations for foreign investment in Europe and around the world, but in recent years, investor and public confidence in how businesses are governed has been undermined by large-scale company failures, such as Carillion, Thomas Cook and BHS, leading to severe job losses and the British taxpayer picking up the bill.
To improve corporate transparency and strengthen the UK’s position as a world-class destination for investors, the government is launching a consultation on wide-ranging reforms to modernise the country’s audit and corporate governance regime, targeting the UK’s biggest businesses and ensuring markets work effectively.
To unleash competition in the audit market, the government’s proposals would see the creation of a new audit profession overseen by a new regulator, which will aim to drive up quality and standards in the market and increase choice for businesses, while breaking up the dominance of the so-called “Big Four” firms. Last year, almost a third of FTSE 350 audits inspected were in need of improvement.
Richard Fuller, MP for North East Bedfordshire and Member of the Business Select Committee said:
By launching a new audit profession, overseen by a new regulator and making directors of the UK’s biggest companies more accountable in the most serious cases of company failings, we will drive up quality and standards and increase effectiveness. These proposals are key to restoring business confidence following the pandemic.
As part of the government proposals to improve the audit market:
- large companies would be required to use a smaller “challenger” firm to conduct a meaningful portion of their annual audit, watering down the supremacy of big-name auditors that put markets at risk whilst boosting jobs and growth of smaller audit firms across the country
- the Big Four could also face a cap on their market share of FTSE 350 audits if competition in the sector does not improve.
- a new regulator, the Audit, Reporting and Governance Authority (ARGA), which could oversee the largest unlisted companies as well as those on the stock market, will also have the power to impose an operational split between the audit and non-audit functions of accountancy firms, to reduce the risk of any conflicts of interest that may affect the standard of audit they provide
To reinforce investor and public confidence in audit:
- new reporting obligations would be introduced on both auditors and directors around detecting and preventing fraud, with boards required to set out what controls they have in place and auditors expected to look out for problems
- audits will also be able to extend beyond a company’s financial results to look at their wider performance, including against key climate targets, to ensure investors and other interested parties are fully informed and can hold companies to account as the UK seeks to eliminate its contribution to climate change by 2050
- the new regulator will be backed by legislation, funded by a mandatory levy on industry, and given much stronger powers to enforce standards. For instance, 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.
Plans also aim to make directors of the country’s biggest companies more accountable if they have been negligent in their duties – reflecting the level of responsibility that comes with holding such a position:
- directors of large businesses could face fines or suspensions in the most serious cases of failings – such as significant errors with accounts, hiding crucial information from auditors, or leaving the door open to fraud
- 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, clamping down on ‘rewards for failure’
- large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency. Directors would also publish annual ‘resilience statements’ that set out how their organisation is mitigating short and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change
The proposals, which will ensure the UK’s markets are at the cutting-edge of global best practice, come alongside the government’s wider work to ensure the UK is a world-class destination for investment, including the Hill Review on listings and Kalifa Review on fintech, as well as the Plan for Growth, which sets out how infrastructure, skills, and innovation will help drive the UK economy.
