BEIS' proposals for UK audit reform: Key points

The government's recommendations for changing the way large companies are audited stop short of the radical approach some had feared, but will require an overhaul of corporate governance practice and the audit market if adopted.

   
This white paper assesses the recommendations of three independent studies commissioned by the government and concludes with BEIS' suggestions for specific changes to the way companies' financial accounts are audited. 
 
It had been expected that the proposal would mirror the US' Sarbanes-Oxley Act of 2002. As outlined in our previous blog on this topic, the radical reforms under the Sarbanes-Oxley Act were heavily criticised in the US.
 
Central to the criticism of audit reform, in general, is that stricter auditing systems impose disproportionately heavier regulatory and cost burdens on businesses, particularly SMEs.
 
Objections to the Sarbanes-Oxley Act have also pointed out that new rules that hold directors personally liable for accounting failures have increased premiums for insurance policies.
 
Consequently, concerns have been expressed about the impact on British businesses if similar reforms are adopted by the UK, especially with the hardship facing many industries in the aftermath of the Covid-19 pandemic.
 
Contrary to expectations, BEIS' proposals do not go as far as the Sarbanes-Oxley Act. However, the white paper does recommend profound changes to the rules on auditing and corporate governance, which will inevitably add red tape and costs for businesses.
 
Key measures BEIS recommends include:
 
Enhancing competition in the audit market
 

• The audit market will be restructured to separate the audit and consultancy branches of the "Big Four" accounting firms;

• Non-Big Four firms must conduct a meaningful portion of audits for the UK’s largest companies; and

• A cap will be placed on market share if competition fails to improve.

Reforming the auditing system
 

• Greater transparency over a company's finances with more stringent reporting for large non-listed companies;

• Extending audits beyond financial statements to review the company's wider performance;

• Mandated shared audits for large companies with smaller rivals; and

• A new regulatory body, the Audit, Reporting and Governance Authority (ARGA), will oversee auditing practices and be granted statutory powers to investigate misconduct and enforce reporting obligations. ARGA will be funded by a mandatory levy on industry.

Increasing director responsibility and accountability
 

• Publishing audit and assurance policies approved by the company's shareholders;

• Introducing new directors' duties on monitoring and reporting on anti-fraud measures;

• Stronger disclosure obligations on directors to publish “resilience statements” that assess financial risks and the measures in place to mitigate them, and attestations on dividends and capital maintenance;

• When faced with insolvency, directors may be prohibited from disbursing bonuses or dividends;

• In instances of company collapse, directors' compulsory repayment of bonuses may be enforced; and

• Directors may be held personally liable for accounting failures, and could face a fine or suspension in extreme cases.

The objective of these changes is to restore public trust in corporate governance and bolster investment in the UK.
 
BEIS has opened a consultation on the paper to give the public and commercial stakeholders a chance to have their say.
 
The full version of BEIS' proposals can be found here, and a consultation response can be submitted via this link. The consultation closes on 8 July 2021 at 11.45pm.
 
This article was authored by Tom Martin, corporate director at Fieldfisher.