Will the new recommendations discourage entrepreneurial endeavour?

The UK’s priority is to ensure that it is protecting its corporate environment and reputation as one of the most transparent places to do business and as a world-class destination for investment.

However, the accounting scandals from Carillion, BHS and Patisserie Valerie raise doubts over the strength of the UK regulatory audit regime. They are clear examples of the need to establish an independent audit supervisory authority in order to safeguard investors and other stakeholders from similar corporate mismanagement in future.

The proposed establishment of the Audit, Reporting and Governance Authority – which will replace the Financial Reporting Council, but with an expanded scope and scale – will aim to tackle fraud and reinforce transparency and trust in Public Interest Entities. It will also promote healthy competition, as the operational separation of the “Big Four” accounting firms will make it easier for smaller rivals to gain larger market shares by managing shared audits.

Up to 2,000 additional entities could be brought under the new scope, which is expected to add more than £200m a year to business costs.

To cope with the increased demand, the Financial Conduct Authority will also need to increase its capacity and capability by expanding its workforce. Establishing the Audit, Reporting and Governance Authority would cost £39m per year, set to be funded by an industry levy.

The white paper “Restoring trust in audit and corporate governance” published by the Government and open to consultation until 8th July 2021, sets proposals and frameworks for how:

  • To restore trust in the UK’s corporations

  • To bring businesses to the forefront of international best practices

  • To empower stakeholders and increase their faith in the system

  • To increase choice and quality in the audit market

The proposals are set to strengthen the law on dividend distributions by requiring companies to report on their distributable reserves, hold Boards accountable for risk management and control systems annually, and carry out a review. In addition, Directors will be required to provide more evidence on how they maintain the short-medium and long-term resilience of their business and explain steps taken to set internal controls.

The Brydon Review recommended introducing two new reporting requirements: a Resilience Statement, and an Audit and Assurance Policy, to bring together relevant information. More information will be required on supplier payment policies and practices and the introduction of a Public Interest Statement setting out how Directors view the company’s public interest obligations and how those self-declared obligations have been discharged each year.

The paper proposes to broaden the regulator’s review powers to scrutinise the entire contents of a company’s Annual Report and Accounts, giving the regulator the ability to direct changes on the Accounts.

Undoubtedly, setting up the new Audit, Reporting and Governance authority will impose higher costs and increased pressures on the cash flow of corporates.

However, the costs shouldn’t be viewed as a hurdle but as a facilitator of sustainable growth.

In return, the proposed changes will increase investors’ confidence in the system and subsequently lower the cost of capital.

Lilian Filips