26 March 2021
Government proposals set to restore trust in audit and corporate governance
On 18th March 2021, the government published a white paper setting out proposals to strengthen the UK's governance framework for major companies and increase confidence in the way in which they are audited. Read on to find out the latest on what's been happening...
What is in the propsals?
The proposals focus on how companies should best report on their corporate governance and finances, how company reports should be audited, how audit processes and the audit market should make changes and that a new regulator should oversee audits.
Three independent reviews commissioned by the government in 2018 made recommendations to which these proposals aim to respond. The three reviews were:
- an independent review of the Financial Reporting Council, by Sir John Kingman
- a statutory audit market study by the Competition and Market Authority, and
- an independent review of the quality and effectiveness of audit by Sir Donal Brydon.
Auditing of company accounts is a process by which the accounts are checked to ensure they give a true and fair representation of the company's financial health. The auditing process is dominated by four accountancy firms, often termed ""The Big Four"". Unfortunately, these four firms, Deloitte, EY, KPMG and PwC often provide both accountancy and auditing services, which has long created concern regarding a conflict of interest.
Under the proposed new rules, companies would be required to use smaller firms for some of their annual audit, which would not only be a boost to business for smaller firms, but also dilute the dominance of the Big Four in this respect.
Another objective of the proposed reforms is to restore trust in the way in which the UK's largest companies are operated and scrutinised. Restoring confidence in business, not only in the business community but also the general public, is key if there is going to be any success in rebuilding the economy after the pandemic. If large companies fail, then the effects are widely felt, primarily with job losses which then means more taxpayer money is required for social benefits.
High profile collapses in recent years such as Thomas Cook, BHS and Carillion have made it clear that the audit process needs major reform. Businesses contribute so much to our way of life; a business will be a supplier, a customer, an employer or in some cases an investment. We require information to make decisions around all of these interactions with businesses and that information should be reliable and truthful to enable the right decisions to be made. Audit is a crucial part of obtaining that information.
The Audit, Reporting and Governance Authority
A new accountancy watchdog will be formed as a replacement for the Financial Reporting Council. The Audit, Reporting and Governance Authority (ARGA) will have legal powers allowing it to enforce resubmission of accounts on auditors and companies without the need to go to court. Companies will also need to be careful with dividend and bonus payments to directors. If there is found to be any misconduct within the firm, the accounts they publish are inaccurate or there are insufficient cash reserves, then payments could be curbed.
The government is also looking to clamp down on what are considered ""rewards for failure"". Directors of firms which have failed can have their bonuses clawed back. This may apply up to two years after the payment was awarded. The new rules should encourage greater transparency regarding company accounts and hopefully deter firms facing potential insolvency from making large dividend and bonus payments. Thus far, accountancy firms have welcomed the proposals and look forward to the outcome of the consultation.
Consultation on the proposals is open now and closes at 11:45pm on 8th July 2021. Online responses are welcomed through the gov.uk website.
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