News Analysis

Overhaul of boardroom rules in the UK “a missed opportunity”

by Stephen Conmy on May 31, 2022

Ministers have scaled back plans to overhaul audit and boardroom rules in the UK, dropping plans that would make directors liable for audit ‘mistakes’ and scaling back plans to expand the number of companies subject to more stringent regulations.

What are the details?

Because the plans have been watered down, just 600 more private companies will be subject to a tighter regulatory system. The original plan was for 4,000 extra private companies to face additional scrutiny.

Also, a proposal to make company directors personally liable for proper financial reporting was dropped.

Instead, the corporate governance code will be amended to add a provision that applies to only large listed companies. Boards can opt not to comply with this provision by explaining their reasons.

However, regulators will have the power to discipline directors who breach their legal duties, ending an anomaly where only qualified accountants were subject to sanctions.

What has been the reaction to the new boardroom rules in the UK?

Sir Jon Thompson, chief executive of the Financial Reporting Council (FRC), said the failure to make company directors liable for proper financial reporting (as they are in the US) was “a missed opportunity to improve internal controls in a proportionate, UK-specific manner”.

Reformed to tackle the dominance of the Big Four

Kwasi Kwarteng, the UK’s business secretary, says the reforms will also curb the dominance of the Big Four audit firms – Deloitte, EY, KPMG, and PwC.

He wants a new, more powerful regulator to replace the Financial Reporting Council. It will be called the Audit, Reporting and Governance Authority (Arga).

Due to recent high-profile audit failures, FTSE 350 companies will have to hand over part of their audit work to a mid-tier firm outside the Big Four.

Arga is unlikely to be fully operational before April 2024 at the earliest.

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