The UK Government has confirmed plans to create a new regulator to reduce the risk of sudden big company collapses and to tackle the dominance of the ‘Big Four’ in the audit sector.
Business Secretary Kwasi Kwarteng wants to introduce plans that would bring greater accountability for big business, and help prevent sudden large-scale collapses like Carillion and BHS, which hurt countless small businesses and led to job losses.
The UK Government also announced that it will review wider reporting burdens on large and small businesses, including those from retained EU law.
In particular, Westminster will update the definition of micro-enterprises. This EU threshold could be forcing too many of Britain’s smallest businesses to spend time and money preparing accounts to a level of detail only needed for larger companies.
The UK Government will also consider the reporting requirements on smaller public interest entities to help attract high-growth firms, and review whether there are unnecessary restrictions on remunerating directors in shares.
The Financial Reporting Council will be replaced by a new regulator - 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 Kwarteng acting to enable the regulator to ban failing auditors from reviewing large companies’ accounts.
For the first time, the largest private companies - not just those listed on the stock exchange - will come under the scope of the regulator.
No extra regulations will be added to smaller businesses through the reforms: the focus is on the UK’s largest companies.
Unlisted companies with more than 750 employees and with more than £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,
The UK Government confirmed it will address ‘rewards for failure’ – where bosses pocket bonuses despite their company collapsing.
The proposals would mean large businesses will have to be more transparent about their profits and losses. They will also have to provide 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 dominance of the ‘Big Four’ audit firms, FTSE350 companies will be required to conduct part of their audit with a challenger firm.
The new regulator 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.
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.
The Department for Levelling Up Housing and Communities has also published a consultation response on plans to strengthen the local audit framework in response to the 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.
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.”
Sir Jon Thompson, chief executive at the Financial Reporting Council, said he welcomed the government's response.
"It was pleasing to see during the consultation process overwhelming stakeholder support for the creation of ARGA with strengthened powers to ensure investors, employees, pensioners and suppliers are better protected against the consequences of corporate failure.
"The government's decision not to pursue the introduction of a version of the Sarbanes-Oxley reporting regime is, the FRC believes a missed opportunity, to improve internal controls in a proportionate, UK-specific manner.
"While we await the final piece of the legislative jigsaw, the FRC will continue to do all in our power to ensure that audit and corporate reporting standards remain high to ensure better outcomes for stakeholders."
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