Corporate Governance snapshot: Fundamental audit and corporate governance reforms proposed by UK government

Companies in scope
The government will bring large AIM companies and large private companies in scope of the new measures, and a number of existing audit related measures, including the requirements to rotate their auditors and put their audits out to tender for the first time.

Director accountability
The new regulator will have power to sanction the directors of all large companies for breach of their Companies Act 2006 duties in respect of reports and accounts, including the duty to approve accounts only if they give a true and fair view.

Audit process and internal control
There will be new reporting obligations on both auditors and directors around internal controls and detecting/ preventing fraud. The government is consulting on different options, including a regime similar in scope to the US’s Sarbanes-Oxley Act on director attestation and auditor assurance on internal controls.

Review of annual reports
The FRC's corporate reporting review powers will be extended so as to enable the regulator to review the entire annual report. The ARGA will no longer need a court order to direct a company to make changes, rectify or restate its annual report and accounts.

Annual report and accounts
The going concern and viability statements will be replaced with a ‘resilience statement’, requiring directors to consider short term, medium term and long term threats to the company’s resilience. A new Audit and Assurance Policy would be required in annual reports, explaining whether, and if so how, a company is planning to obtain assurance on its company reporting beyond its statutory audit. Main market listed companies will be required to put this policy to an advisory shareholder vote.

Dividends
Directors will be required to make a formal statement about the legality and affordability of any proposed dividend

Audit market
FTSE 350 companies will be required to use a smaller “challenger” firm to conduct a “meaningful portion” of their annual audit as part of a “shared audit” regime.

Executive pay
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.