Tighter rules

Reforms usher in tougher regulations on auditors

Carillion sign
Auditors failed to spot problems at Carillion

Business Secretary Kwasi Kwarteng today confirmed it will introduce reforms aimed at preventing more shortcomings in the audit profession which failed to detect problems at big firms such as Carillion and Bhs.

Additionally, the UK Government has announced today that it will review wider reporting burdens on large and small businesses including those from retained EU law.

The Financial Reporting Council will be replaced by the Audit, Reporting and Governance Authority (ARGA) – with tougher enforcement powers and funded by a levy on industry.

Work on this has already begun, with the Business Secretary today acting to enable the regulator to ban failing auditors from reviewing large companies’ accounts.

No extra regulations will be added to smaller businesses through the reforms: the focus is on the UK’s largest companies because so many jobs, suppliers and pensions depend on them.

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Large unlisted private companies will, for the first time, come under the scope of the new regulator and there will also be an update of the definition of micro-enterprises. This aims to ease pressures on Britain’s smallest businesses to spend time and money preparing accounts to a level of detail only needed for larger companies.

Unlisted companies with more than 750 employees and with over £750m annual turnover will come under scope of the regulator, a threshold set following consultation to ensure the reforms are as targeted as possible and minimise unnecessary burdens.

Directors at the biggest companies who breach their legal duties to be open with auditors, or lie about the state of their firm’s finances, will face sanctions such as fines, and the Government will act to address ‘rewards for failure’ – where bosses pocket bonuses despite their company collapsing.

Large businesses will have to be more transparent about their profits and losses – not dishing out dividends while on the brink of collapse – while also providing more information to investors and the public about what they have done to prevent fraud, which company metrics have been independently checked and about the risks their company faces.

To curtail the unhealthy dominance of the ‘Big Four’ audit firms, FTSE 350 companies will be required to conduct part of their audit with a challenger firm.

The new regulator, ARGA, will also be given the power to make big audit firms keep their audit and non-audit functions operationally separate and to enforce a market cap if the state of the market doesn’t improve.

Minister for Corporate Responsibility Lord Callanan said: “Collapses like Carillion have made it clear that audit needs to improve, and these reforms will ensure the UK sets a global standard.

“By restoring confidence in audit and corporate reporting we will strengthen the foundations of UK plc, so it can drive growth and job creation across the country.”

The UK Government has previously confirmed its commitment to publish a draft Bill to revamp the UK’s audit and corporate reporting regime this parliamentary session.

Martin McTague, FSB chairman
Martin McTague: transparency is the right direction

The Department for Levelling Up Housing and Communities has today also published a consultation response on plans to strengthen the local audit framework in response to Redmond Review. The plans include establishing ARGA as the system leader for local audit, which will ensure councils and local bodies are delivering value for money for taxpayers.

The plans build upon the recommendations of independent reviews by Sir John Kingman, Sir Donald Brydon, and the Competition and Markets Authority.

The Federation of Small Businesses (FSB) National chair Martin McTague said: “It’s good to see BEIS grasping the nettle on audit reform. As legislation is drawn up, the key to success will be making corporate Audit Committees directly responsible for reporting on payment and wider supply chain practice. 

“When we were the first group to flag the ramping up of unreasonable payment terms at Carillion, six months before the company collapsed, nothing was done. 

“In order for today’s measures to work, there must be inclusion of payment practices within Audit Committees’ remits. This reform would ensure a whole board awareness of payment practices. Without it, there will be more Carillions.

“Improving transparency at big corporates whilst easing unnecessary reporting burdens for small businesses is the right direction of travel.  

“It’s now a case of making sure the resulting Bill is fit for purpose as the legislative vehicle needed to make a real difference. We look forward to working with the Business Secretary Kwasi Kwarteng to ensure it does.” 

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