Consultation on wide-ranging reforms to modernise the UK’s audit and corporate governance regime

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18 March 2021 - The government has today announced major new reforms to the UK’s audit regime with the aims of safeguarding British jobs, avoiding company failures and reinforcing the UK’s reputation as a world-leading destination for investment. 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.

Business Secretary Kwasi Kwarteng commented:

“Restoring business confidence, but also people’s confidence in business, is crucial to repairing our economy and building back better from the pandemic.

“When big companies go bust, the effects are felt far and wide with job losses and the British taxpayer picking up the tab. It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms.

“By restoring trust in our corporate governance regime and encouraging greater transparency, we will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country.”

The main proposals contained in the government’s consultation include the following.

Addressing Sir Donald Brydon’s recommendation for a new audit profession

• a duty for auditors to take a wider range of information into account, and powers for the regulator to set enforceable principles for auditor conduct
• new reporting requirements for larger companies on anti-fraud measures and the level of independent scrutiny given to their published reports
• a voluntary scheme for the audit and assurance of more non-financial information over and above the statutory audit
• encouraging audit and assurance professionals to work towards a new audit profession, rather than a subset of the accountancy profession as now

Addressing the CMA’s findings that the “Big Four” firms dominate the audit of FTSE350 companies, harming audit quality and undermining market resilience

• growing the capacity and capability of challenger firms by giving the regulator powers to operate a managed shared audit regime (in which a subsidiary company audit is done solely by a challenger firm) and, to follow if needed, a managed market share cap reserving a proportion of listed company audits for challenger firms
• new powers for the regulator to set and enforce standards for FTSE 350 companies’ audit committees; new powers to impose an operational split between the audit and non-audit functions parts of accountancy firms; and new powers to monitor the resilience of the largest audit firms, together with improved powers to monitor the broader audit market

Addressing Sir John Kingman’s recommendation that the current audit regulator, the Financial Reporting Council, is not well equipped to tackle these and other challenges and should be replaced

• replacing the FRC with the Audit, Reporting and Governance Authority (ARGA), a regulator whose objectives, governance and funding will be underpinned by legislation
• expanding the definition of “Public Interest Entity” to include some very large non-listed companies, which will have to meet more stringent reporting and audit requirements (addressing issues arising from BHS and other failures) – recognising their economic importance and how this should be reflected in their responsibilities. The government will also consider an option to exempt newly listed firms from requirements associated with becoming a PIE to ensure the UK stays competitive on listings
• new directors’ duties relating to internal controls and risk management in a way that builds upon the UK’s existing framework, with the government’s initial suggested option less burdensome than the US Sarbanes-Oxley system and providing companies and shareholders greater flexibility
• new powers to hold directors of large companies to account in relation to their reporting and audit obligations
• improved powers to review companies’ corporate reporting, including proposals to extend those powers to the whole annual report
• stronger oversight of the accountancy and actuarial professions
• improved powers to monitor the quality of audits including powers to publish inspection reports in full

The proposals, which are aimed at ensuring that 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 the 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.

The consultation period will last for 16 weeks.

Consultation document may be found here.

Published 18 March, 2021