Government Response to Consultation on Audit and Corporate Governance Reform – Corporate Governance

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The Department for Business, Energy and Industrial Strategy has released the answer to its March 2021 consultation on audit and corporate governance reform, Restoring trust in auditing and corporate governance (for more details see our company update from March 2021). Most of the proposals contained in the consultation will be implemented, a number in modified form based on the comments received.

The reforms will see the creation of the Audit, Reporting and Governance Authority (ARGA) as a successor regulator to the Financial Reporting Council (FRC). The ARGA will have a broader mandate and significantly expanded powers compared to the FRC.

The majority of the changes will impact Public Interest Entities (PIEs), a concept derived from the EU Audit Directive (as implemented in UK law). The reforms expand the current UK definition of PIEs to include all companies (and groups) incorporated in the UK with both 750 or more employees and an annual turnover of £750 million or more (the 750 million threshold :750). AIM companies and LLPs that meet the 750:750 threshold will also be PIEs under the reforms.

The far-reaching reforms will introduce a number of fundamental changes to the corporate governance and information landscape. These include:

  • Missions of the administrators – The ARGA will be empowered to sanction failures by directors to fulfill their duties in terms of corporate auditing and reporting. All the administrators of EIPs (and exceptionally, the administrators of their subsidiaries) will fall within the scope of this new enforcement power.

  • Internal controls – The FRC will amend the UK Corporate Governance Code to require an explicit statement by the board of directors on the effectiveness of the company’s internal control systems and on the basis of this statement. This was one of three options that the government consulted on to strengthen the requirements for internal control systems – another of the options that was not taken up was a statutory reporting and assurance regime similar to the regime American Sarbanes Oxley.

  • Dividends – PIEs meeting the 750:750 threshold will be required to explain their long-term approach to returning shareholder value and how this policy has been applied during the reporting year. The directors of these PIEs will also have to confirm the legality of any dividend proposed or paid during the year. They will not need to provide a two-year solvency statement before any dividends are paid, as had been proposed.

  • Reports – A number of changes are introduced regarding corporate reporting. These new reporting requirements will apply to EIPs meeting the 750:750 threshold. They understand:
    • the replacement of the viability and going concern statements of the UK Corporate Governance Code with a new statutory statement of resilience, which will form part of the strategic report;

    • require the publication every three years of an audit and assurance policy (AIP) and an annual report on the implementation of the AIP; and

    • hold administrators accountable for measures taken to detect and protect against material fraud.

The government has also confirmed a number of measures aimed at reforming the audit market and modifying the regulation of auditors.

The reforms will be implemented through primary and secondary legislation and amendments to the UK Corporate Governance Code. Accordingly, and in order to give companies time to prepare for the new regime, the reforms will be implemented over several years.

An easy overview of the reforms can be found here. We will produce a more detailed briefing on the reforms in due course.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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Helen D. Jessen