Corporate governance in the UK is about to undergo its biggest transformation in a generation. On 8th July, the Government consultation into the powers held by the new Audit Regulation and Governance Authority (ARGA), closes. 

The review came as a result of a number of corporate scandals and failings, resulting in the need for dramatic and far reaching changes. The aim is to ensure that investors, users of corporate reporting, and the wider public interest are protected. 

What is expected?

Increased Director Accountability

• ARGA will have the power to sanction directors of all large companies for breach of their duties under the Companies Act 2006 in respect of the company’s reports and accounts, including the duty to approve accounts only if they give a true and fair view.
• Directors will also be more accountable for negligence in their duties, for example, a director may be required to repay their bonus for breaching their duties.
• Directors will be asked to prepare ‘resilience statements’ about how the company is managing its risks, which consolidates and builds upon the current going concern and viability statements.

Rigorous Audit process

• There will be new reporting obligations on both auditors and directors around internal controls and detecting/preventing fraud. It is consulting on different options, including a regime similar in scope to the US’s Sarbanes-Oxley Act (“SOX”) on auditor assurance on internal controls.
• The current compulsory ‘going concern’ statement and ‘viability statement’ will be replaced with a ‘resilience statement’
• FTSE 350 companies may be forced to use smaller challenger firms on part of the audit in order to broaden the number of audit firms use.
• There will be greater obligations on auditors around fraud detection.
• A three year rolling Audit and Assurance Policy which would document the company’s approach to auditor selection and rotation.
• Companies will be asked to include Non-financial metrics and measures on things like climate change targets. 

Corporate governance proposals

• Under the UK Corporate Governance Code (“UK Code”), listed companies will be expected to be able to recover bonuses or share awards from executive directors if they have failed to protect customers’ and employees’ interests.
• New dividend disclosures whereby directors will be required to make a formal directors’ dividend statement about the legality and affordability of any proposed dividend.
• ARGA would be made responsible for approving the auditors of Public Interest Entities (“PIEs”) i.e. those entities with publicly listed securities in the UK, credit institutions or insurance undertakings.
• Expansion of definition of PIEs to include AIM listed clients with a market capitalisation above £200m and certain large private companies.
• Requiring directors of PIEs to report on steps taken to prevent/detect fraud.

What are the potential implications?

• Greater focus on the effectiveness of internal controls through increased internal audit budgets
• Personal liability for Directors if failings are found
• Directors requiring a better understanding of internal controls and audit findings
• Companies choosing not to list in the UK
• A wider range of audit firms engaging in the audit of UK listed companies

How are you and your business preparing for the forthcoming changes?

With over 16 years of experience in the internal audit market, Savant is able to provide qualified internal audit, internal controls and risk management professionals on an interim, project or permanent basis. 

Please feel free to contact Paul Clutton to discuss your requirements.