A seismic overhaul of corporate governance in the UK is on the way. Directors on UK boards will be held personally liable for the accuracy of their company’s financial statements. Board members will also face fines and bans for significant failures.
A series of hard-hitting reforms to the audit industry is part of a new white paper by Beis, the UK business department.
The audit industry changes come in the wake of scandals at companies like Carillion and Patisserie Valerie.
UK directors will be liable for risk management
The changes to the UK audit industry will make directors, rather than boards, “personally responsible for the accuracy of company financial statements through the sign-off of internal controls and risk management”.
The UK’s ‘Big Four’ accounting firms have until 2024 to separate their audit practices following a ruling from the accounting regulator.
The key reforms mean:
- Directors may be fined or temporarily banned if they are found to have breached their duties to corporate reporting and audit standards.
- The regulator will also be given the power to set and enforce standards for audit committees of FTSE 350 companies.
- New rules to highlight environmental and social responsibilities will be introduced.
Reforms needed but at what cost?
A government spokesperson said strengthening the UK’s corporate governance regime would maintain the country as a leader in corporate transparency and increase its status as a place with the highest audit standards.
However, the proposed rules could result in a higher cost of compliance, and raise questions about the extra burden on British companies in the wake of the pandemic.
David W Duffy, CEO of the Corporate Governance Institute, says the reforms could mean higher costs for British firms. “The government needs to ensure there aren’t so many constraints that it will be too expensive to do business in the UK, but the reforms are definitely needed.”