Ministers have played down plans for an overhaul of Britain’s audit and board rules, dropped proposals to require directors to sign off on companies’ internal controls and scaled back the expansion of the number of companies that meet the strictest requirements.
The changes would mean the reforms would bring just over 600 private companies into the tighter regulatory regime, while the original plan could have doubled the number of so-called “public interest entities” (PIEs) to as many as 4,000.
Proposes to hold directors personally accountable for internal control over financial reporting, echoing the Sarbanes-Oxley Act in the United States, also discardedInstead, a provision will be added to the corporate governance code that applies only to the largest public companies and that boards can choose not to comply with, as long as they explain why.
However, regulators will have the power to penalise directors who breach their legal obligations, thus ending the anomaly where only directors who are qualified accountants face sanctions.
The long-awaited overhaul, which will be unveiled on Tuesday, is the culmination of three independent reviews over the past three-and-a-half years and a public consultation that ended last July.It aims to prevent a repeat of the scandal, including Retailer BHS and Outsourcer Carillion crashed in 2016 and 2018, respectively.
Commerce Minister Kwasi Kwarteng will say the reforms will finally address the dominance of the big four audit firms – Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. He will also confirm plans to replace the Financial Reporting Council with a new, stronger regulator, the Audit, Reporting and Governance Authority (Arga).
But the government has faced criticism for downplaying the reform package. FRC chief executive Sir Jon Thompson said the failure to introduce Sarbanes-Oxley-style rules was a “missed opportunity to improve internal controls in an appropriate, UK-specific way”.
Michael Izza, chief executive of ICAEW, a body of chartered accountants, said the package of measures “feels half-hearted and unbalanced”, adding: “The lessons of Carillion and other recent firm failures are being Overlooked, there is now little emphasis on strengthening internal controls and modernizing corporate governance.”
But Roger Barker, director of policy and governance at the Institute of Directors, said it was “understandable” for the government to limit the expansion of the PIE regime to a small number of private companies “because of the need to minimise the additional regulatory burden on businesses in a challenging environment. economic environment”.
Separately, Kwarteng will also announce a review of businesses’ corporate reporting burden, including retained EU laws, to “maximise the benefits of Brexit”. As part of this, the government will consider changing the definition of “micro business”, as too many small companies have to prepare unnecessarily detailed accounts due to EU directives.
Earlier this month, the government omitted audit and board reforms from its legislative plan for the upcoming parliamentary year. Instead, it plans to release draft legislation within the next 12 months, which could make its way into the regulatory books sometime in the next two years. As such, Arga is unlikely to be up and running until April 2024 at the earliest.
One of the key reforms is that the largest private companies will be brought under the purview of the regulator, which currently only oversees public companies. However, amid objections from business leaders, it is estimated that only 600 businesses with more than 750 employees and an annual turnover of more than £750 million will be designated as PIEs.
The Ministry of Commerce said it had shifted the threshold to make the reform more targeted. “No one is in favour of unnecessarily burdening businesses,” said Commerce Minister Lord Callanan.
Large corporations must also confirm the legitimacy of paying dividends and provide more information about what they are doing to prevent fraud.
FTSE 350 companies will be told to hand over part of their audits to a mid-sized company outside the Big Four to address market inflexibility if one of the Big Four fails. If necessary, ministers can choose to cap the market share of audit firms in the future.
Kwarteng will also act to enable the current regulator, the FRC, to Banning failed auditors From reviewing the accounts of large companies.