The UK government has published its keenly awaited proposals for a wide-ranging reform of its audit and corporate governance oversight framework.
Business secretary Kwasi Kwarteng said: “I am determined to reinforce the UK’s position in the wake of large corporate failures that have led to job losses and uncertainty among small businesses and local communities.
“I want to ensure investors can get high quality, focused and reliable information on UK companies so they can invest here with even greater confidence.”
The proposals, if adopted following a four-month public consultation that runs until July, could see companies face restrictions on dividend payments to shareholders and bonus handouts to company executives.
Company directors could also face fines and other sanctions if they fail to take adequate steps to safeguard against misstatement or fraud.
Finally, the government has also outlined the steps it says are necessary to replace the UK’s audit watchdog, the Financial Reporting Council, with a new regulator, an Audit, Reporting and Governance Authority, with a specific and broader remit defined in law.
Under the proposed changes, the FRC would have the power to:
- force companies to make changes to their accounts without needing to go to court for an order compelling them to do so;
- bring greater transparency to the FRC’s work; and
- extend the FRC’s powers of review to cover the entire annual report.
FRC chief executive officer Sir Jon Thompson welcomed the proposals as a “significant milestone towards setting up a new, robust and independent regulator, which has the necessary powers to deliver its objectives, and on the ambitions set out in the three independent reviews.”
These three reviews are the review of the FRC, led by Sir John Kingman, the Brydon review into the quality and effectiveness of audit, and the Competition and Market Authority’s (CMA’s) statutory audit services market study.
Chris Cummings, chief executive of the Investment Association, said the consultation was an important step in the long-overdue process of audit reform.
“Investment managers have an important role to play in holding companies to account on their audit quality, and our members are committed to playing their part to drive up standards and improve transparency from auditors and companies,” he said.
“We look forward to working with government and industry in our role as secretariat to the new Audit Users Review Board to improve audit quality.”
The Audit Users Review Board was originally proposed by Sir Donald Brydon as a replacement for the Audit Quality Forum.
Meanwhile, UK lawmaker Sharon Bowles, who sits in the UK parliament’s upper chamber, gave the proposals a cautious welcome but said she was “disappointed” that the proposals fell short of mandating joint audits, opting instead for shared audit.
Under the shared audit proposition, a large audit firm would hand over a proportion of its work on a company audit to a smaller, challenger rival.
This compares with a joint audit regime where the two firms would share liability for the entire audit.
The CMA has previously argued that joint audits would lead to improvements in audit quality.
Bowles added, however, that she welcomed the government’s proposal to bring large private companies into the net is welcome and essential within the scope of the proposed changes.
Interested parties have until 8 July 2021 to comment on the proposals, which can be found here.