The Department for Business, Energy & Industrial Strategy (BEIS) recently published a consultation paper titled “Restoring trust in audit and corporate governance”, proposing substantial and long-awaited reforms to the UK audit and corporate governance rules. In this note, we summarise the proposals, focusing on those proposals which impact directors, reporting and governance.
On 18 March 2021, the Department for Business, Energy & Industrial Strategy (BEIS) published a consultation paper titled “Restoring Trust in Audit and Corporate Governance”. The White Paper proposes substantial and long-awaited reforms to the UK audit and corporate governance rules, and companies who wish to shape the outcome of the proposals have until 8 July 2021 to respond.
The White Paper follows three independent reviews commissioned by the UK Government in 2018: the Kingsman “Independent Review of the Financial Reporting Council; the Competition and Market Authority’s “Statutory Audit Services Market Study”; and Brydon’s “Independent Review of the Quality and Effectiveness of Audit”.
The proposals set out in the White Paper are part of a wider package of reforms designed to ensure that the UK has a strengthened governance, reporting and audit framework to improve investor and public confidence in the way its largest companies are operated and scrutinised. However, the proposals in this consultation are a key part of that package, and it is critical that companies understand the potential impact of the proposals on their business, engage with the consultation, and then follow the outcome in order to be ready to comply with the resulting changes.
Those changes seem likely to be significant, not only in terms of how companies report on their governance and finances, but also to how reports are audited and how the audit market operates more widely. In addition to the likely increases in compliance costs as a result of these changes, the Government is proposing to impose further liabilities on directors in relation to audit and reporting, which may well push directors to demand higher salaries before taking on these roles. Finally, the potential risk for more significant and occurring liability for directors resulting out of these far-reaching proposals is likely to drive the premium of D&O insurance up.
The proposals set out in the White Paper set out how:
a new independent statutory auditor (the Audit, Reporting and Governance Authority (ARGA)) will oversee these areas in place of the Financial Reporting Council which has been criticised for its lack of enforcement power. The new regulator will be equipped with new enforcement and investigatory powers to directly order changes to company’s reports and accounts (without a court order) and, thanks to the extension of the corporate reporting review process, to review governance statements and reports by audit and remuneration committees.
This note focuses on those proposals which impact directors, reporting and governance.
The Government wants to ensure that the largest companies in the UK which are of public importance are subject to the changes. The proposals will primarily apply to those companies that fall within the definition of Public Interest Entities (PIEs), which means public companies listed on regulated markets, credit institutions and insurance undertakings. The Government is consulting on extending this definition to potentially include:
The following key proposals are set out in the White Paper.
The proposals recognise that reporting required to comply with the recommendations of the Taskforce on Climate-Related Financial Disclosures may also overlap with the requirements to report for the new Resilience Statement and the Government is looking for views on how these reporting measures may be integrated.
In addition, the proposals suggest that for quoted companies, the Audit and Assurance Policy should be subject to an advisory vote of shareholders.
The Government is also seeking views as to whether directors should be required to meet certain behavioural standards when carrying out their statutory duties relating to corporate reporting and audits.
Whether or not all of the proposals in the White Paper will be implemented (and in which form) remains to be seen; however it is clear from the general direction of travel that there will be more accountability, more regulation, and with it, increased processes and costs for the relevant companies and directors. Proactive engagement by affected companies will be critical in shaping the outcome of these proposals.