How corporate governance and audit reforms will impact your board

In March 2021, the Department for Business, Energy & Industrial Strategy (BEIS) published its keenly-awaited proposals for reforms to corporate governance and audit in the UK.

What better way to discuss them than bringing together a panel of experts that included Sir Jon Thompson himself? As chief executive of the Financial Reporting Council (FRC), Sir Jon is not only one of the key shapers of the reforms, but he will also oversee the FRC’s transition into a new, more powerful regulator, the Audit, Reporting and Governance Authority (ARGA).

As the webcast’s moderator, I also had the opportunity to canvas the views of Non-Executive Independent Director, and Audit and Risk Committee Chair, Margaret Ewing, and EY’s UK Chair and former UK Head of Audit, Hywel Ball.

For those with a keen interest in the subject, I would strongly recommend watching the whole discussion – including an eloquent introductory overview of the proposals from Sir Jon here. 

Setting the context

The consultation document puts forward a number of recommendations, including:

• the UK adopting a version of the Sarbanes-Oxley Act, particularly around directors’ responsibilities and strengthening internal controls, the statement to be made by the board and the extent to which that statement is audited for assurance.
• minimum standards on the strength and oversight of audit committees.
• a new audit and assurance policy introducing additional assurance over information prepared for shareholders.
• a new resilience statement to replace the existing viability statement.
• the proposed introduction of managed shared audits and a new, powerful regulator. For more detail, you can find our analysis and commentary on the consultation here.

Initial responses

All welcomed the holistic nature of these reforms. Hywel Ball, in particular, has long argued that if audit reform is to achieve its objective of rebuilding society’s trust in business, it must be accompanied by corporate governance reforms and a regulator that holds both company directors and auditors to account. He has also been a long-term advocate of the importance of the non-financial aspects of corporate reporting, so welcomed their inclusion in proposals.

One area of concern has been the extra regulatory burden placed on listed companies in complying with these recommendations, potentially further widening the compliance gap with private companies. Here, Sir Jon was clear that the proposals would also apply to large private companies, although the detail on what constitutes a public interest entity (PIE) and whether it would one day extend to third sector organisations, like universities or hospitals is not yet settled.

Timing was also a key issue, with Sir Jon acknowledging that the wide nature of the proposed reforms made a staggered introduction over the next two to four years, the most likely option, with the largest companies being the first across the threshold. Timing-related questions were also raised over the ability of companies in fast-moving sectors to confidently report on their long-term resilience.

The concept of joint audits has been replaced by a proposal for managed shared audits. These aim to encourage and build the capacity of challenger firms by enabling them to carry out components of audits being carried out by Big Four firms. Margaret Ewing expressed concerns about the likelihood of shared audits enhancing audit quality, as well as the myriad practical issues likely to arise. 

While some concerns were raised about the implications in terms of cost and ultimate responsibility, Sir Jon was clear on the need to broaden the audit market.

What businesses need to do next

While believing that the proposals should not present any major challenges to well-run businesses with good practices already in place, Sir Jon did highlight three areas of focus: reviewing internal controls, examining transparency in relation to risks and reassessing the strength of audit committees. Margaret Ewing talked about the impact that the proposed changes may have on audit committees, who need to ensure that members come to the table with diverse backgrounds and skills, including digital and transformation change experience as well as audit, accounting and industry expertise. Those without the corporate reporting and audit experience may find it more difficult, or be less interested in joining now, given the additional responsibility, she felt.

Sir Jon reiterated the need for companies to look again at their reporting of the impacts of their company on the planet and at Environmental, Social and Corporate Governance (ESG) reporting in general.

Looking ahead

The panel’s feeling that some aspects of the proposals did not go far enough, while others may go too far, probably reflects the complexity of the challenge and perhaps is a sign that, on balance, the proposals have got it just about right.

But ultimately, they will be judged against their desired outcome: restoring public trust in the way that the UK’s largest companies are run and scrutinised, helping the UK remain an attractive place to do business and making sure its capital markets provide a stable, well-regulated environment for investors seeking long-term returns. By succeeding, the reforms can help to create a more stable future not only for businesses and markets, but for society as well.

As Sir Jon said, this has been an extensive and far-reaching review, to bring about a ‘significant package of changes’ that will take several years to implement and lead to a step change in corporate governance and audit in the UK market. We would encourage board members to be part of the debate, whether responding to the BEIS consultation, sharing their views with the Audit Committee Chairs’ Independent Forum (ACCIF), 100 Group, and/or directly with the FRC by way of their upcoming events.

Now, more than ever, it is critical that they take the opportunity to have their say.