The UK government has now published a response to its 2021 consultation on strengthening the UK’s audit, corporate reporting and corporate governance systems (Restoring trust in audit and corporate governance). 

The government has confirmed that a new regulator, the Audit, Reporting and Governance Authority (ARGA), will be established. Its overarching objective will be to protect and promote the interests of investors, other users of corporate reporting and the wider public interest. 

The response confirms that the government will take forward a significant number of the reforms proposed in the 2021 consultation paper. We are working our way through the response and will publish a series of articles and posts on the key themes and the likely impact on corporates.

Key themes include:

• establishing ARGA as the new regulator: ARGA's objective will be to protect and promote the interests of investors, other users of corporate reporting and the wider public interest.
• More companies will be Public Interest Entities: the government intends to treat large private companies with 750+ employees and an annual turnover of £750m+ (the 750:750 test) as public interest entities (PIEs). Companies with shares admitted to trading on AIM which pass this test will be PIEs. Some of the audit requirements which apply to existing PIEs will not apply to these size-based PIEs. 
• Internal control and risk management systems:  in a significant departure from the proposals contained in the consultation (covered in our earlier post Is SOX coming to the UK?), the government will invite the regulator to strengthen the UK Corporate Governance Code (UKCGC) to provide for an explicit statement from directors in the annual report about the effectiveness of the company’s internal controls and the basis for that assessment.  PIEs that meet the 750:750 test will be required to report on actions they have taken to prevent and detect fraud.
• Dividends: PIEs which meet the 750:750 test will be required to disclose their distributable reserves. They will also be required to provide a narrative explaining the board’s long term approach to the amount and timing of returns to shareholders. The directors of qualifying PIEs will also be required to make a formal statement in the annual report confirming the legality of proposed dividends and any dividends paid in year. However the proposal that the directors confirm that payment of a dividend will not threaten the solvency of the company over the next two years has been dropped.
• New statutory resilience statement: PIEs which meet the 750:750 test will be required to report on material challenges to resilience over the short and medium term. The existing viability statement (required by provision 31 of the UKCGC) will be incorporated and adapted within the statutory requirements for the resilience statement. The FRC will also consult on removing provision 30 (which covers going concern statements) from the UKCGC.    
• New statutory audit and assurance policy: PIEs which meet the 750:750 test will also be required to publish an audit and assurance policy (AAP) every three years. The AAP will set out the company’s approach to assuring the quality of the information it reports to shareholders beyond that contained in the financial statements. There is no requirement for any form of shareholder vote on the AAP. However qualifying PIEs will be required to publish an annual implementation report, in which the directors, most likely via the audit committee, provide an update on how the assurance activity outlined in the AAP is working in practice. 
• Corporate reporting review powers: the government will strengthen the regulator’s corporate reporting review powers. It intends to ensure that ARGA can direct changes to company reports and accounts, rather than having to seek a court order, along with powers to publish summary findings following a review. The regulator’s review powers will also be extended to cover the entire contents of the annual report and accounts. 
• Enforcing statutory directors' duties: giving ARGA powers to enforce Public Interest Entity directors’ statutory duties and responsibilities relating to corporate reporting and audit. The new civil enforcement regime is intended to "be targeted, proportionate and transparent". Directors will only be accountable for what could reasonably be expected of a person in their position.
• Recovering remuneration from directors: the government will also invite the FRC to consult on changing the UKCGC so that it provides greater transparency about malus and clawback arrangements which exist to withhold or recover remuneration from directors. 
• Competition and choice in the audit market: the government will introduce a package of measures to increase choice and to improve resilience in the audit market for the largest companies. This will include the introduction of a "managed shared audit" regime on a phased basis. This is intended to give challenger audit firms the opportunity to audit a meaningful proportion of subsidiary audits conducted for FTSE 350 companies.  

Next steps

The government has already announced its intention to prepare and publish a draft Audit Reform Bill. The government's response does not set out a precise timetable for reform. Instead it expects that "multiple strands of reform" will be progressed over a period of several years.

Further information

If you would like to discuss these reforms please contact Nick Graves or another member of the Burges Salmon Corporate Group.