Restoring confidence in corporate and audit reporting: The BEIS’s upcoming reforms and how they’ll change the reporting landscape

Given the current political and social uncertainties at the hands of inflation, supply chain disruptions and the ongoing impact of the pandemic and Brexit, it is increasingly essential for companies to enhance and communicate their internal control and risk frameworks.

However, due to several auditing scandals, there has been a negative shift in the public’s perception of the credibility of corporate governance and the fulfilment of reporting duties by directors. 

Consequently, following Parliamentary hearings, independent reviews and extensive consultations, the UK Government has published “Restoring trust in corporate governance and audit”, with the aim of rebuilding confidence through regulatory reform. The Department for Business, Energy & Industrial Strategy’s (BEIS’s) consultation outcome outlines the proposed reforms which will increase accountability for those with senior responsibilities in businesses and strengthen reporting and auditing standards. 

With these new reforms coming down the pipeline, this whitepaper will explain BEIS’s proposals and what they mean for future reporting and auditing. 

Reporting authority

The establishment of a stronger regulatory body is demonstrative of the plans to implement high quality and high standards in corporate reporting. In 2023/24, the FRC will be replaced by the Audit, Reporting and Governance Authority (ARGA), which will have more powers in the overseeing of corporate reporting and auditing than its predecessor. This includes the ability to:

• enforce the financial reporting duties and supervise corporate reporting and audit-related responsibilities of directors;
• investigate and sanction directors for breaches of their corporate reporting duties, meaning directors could face fines or suspension for serious failings of their responsibilities;
• review the entire annual report and will not require a court order to direct a company to make changes to its annual report and accounts; and
• oversee the accounting and actuarial professions.

Companies affected by the reforms

Another considerable change is the new definition of a public interest entity (PIE), which is the type of company that will primarily be impacted by the reforms. Expanding on the current criteria, companies with both 750 or more employees and an annual turnover of £750 million will now be considered PIEs. This new scope includes AIM and private companies which meet this 750:750 threshold. 

Key changes for companies and directors

• Audit process and internal controls: Boards will be required to include a statement in their annual report on the effectiveness of their internal control systems. They will also have to report on the actions they have taken to prevent and detect material fraud. 
• Resilience statement for PIEs: The going concern and viability statements will be replaced by a resilience statement which will set out the company’s approach to managing risks and developing resilience over the short, medium and long term. 
• Dividends: PIEs will have to disclose their distributable reserves and explain the board’s approach to the returning value to shareholders and how the distribution policy has been applied. It will also require companies to publish a formal statement on the legality of a proposed dividend.
• Remuneration: The FRC is currently looking to adapt the UK Corporate Governance Code to require companies to be more transparent about the remuneration paid to executive directors.    

Key changes for audit committees

• Breaking up the Big 4: FTSE 350 companies will have to use a non-Big 4 auditor for a “meaningful proportion” of their annual audit or appoint one of these “challenger” firms to conduct their entire audit. The aim of this is to increase competition in the audit markets. The definition of a “meaningful proportion” will be set by ARGA with the expectation that it will be amended over time as challenger firms grow. 
• Audit and assurance policy (AAP): PIEs will have to publish an AAP every three years with an annual implementation update. This will set out the company’s internal auditing process and explain whether and how it is obtaining assurance on its company reporting beyond its statutory audit. 
• Auditors and shareholder engagement: ARGA will set minimum standards for audit committees relating to the appointment and oversight of auditors and will include provisions to encourage shareholder engagement with an audit. 

To learn more about the current and upcoming UK reporting requirements, get in touch with our Insights & Engagement Director, daniel.redman@design-portfolio.co.uk