UK

Ministers to set out long-awaited shake-up of UK audit regulations

Ministers will set out plans to overhaul the regulation of UK auditors and boardrooms in the coming weeks, ending a long wait for the reforms that were first proposed more than three years ago.

The proposals have been circulated to government departments for final sign-off, according to two government officials. But they cautioned of possible further delays to the implementation of the new rules as there was no guarantee they would be included in the government’s next legislative programme.

The long-delayed overhaul was triggered by a series of corporate collapses and accounting scandals, including café chain Patisserie Valerie in 2019, outsourcer Carillion in 2018 and retailer BHS in 2016.

The shake-up would replace the Financial Reporting Council, the UK’s audit and accounting regulator, with a new watchdog with greater powers to police company directors, called the Audit Reporting and Governance Authority.

The changes are expected to include the introduction of “managed shared audits”, requiring FTSE 350 companies audited by one of the Big Four accounting firms — Deloitte, EY, KPMG or PwC — to hand part of the work to smaller accounting firms to improve competition. They are also expected to extend the definition of “public interest entities”, imposing extra governance requirements on more companies.

The reforms are expected to be put forward in the Queen’s Speech in May, which sets out the legislative calendar for the 2022-23 parliamentary session. But officials indicated the proposals could take the form of draft legislation, which would require further scrutiny, possibly delaying their passage into law until 2024.

Business secretary Kwasi Kwarteng had made the reforms a priority when he took office in January 2021 and the Conservative party’s 2019 election manifesto had also pledged to shake up the UK’s audit and corporate governance regimes. But now prime minister Boris Johnson is keen to prioritise new legislation that has a broad appeal to voters.

Supporters of the reforms, which were drawn up after three reviews in 2018 and 2019 recommended sweeping changes, have been frustrated by the slow progress.

“After years of consultations and delay it’s clearly disappointing that the government hasn’t yet found the time to bring forward the required legislation,” said Darren Jones, a Labour MP and chair of the House of Commons business select committee. “I hope ministers will walk the walk and make sure it’s included in the next Queen’s Speech.”

Sir Jan du Plessis, who was appointed chair of the FRC this month, told MPs in January that the possibility of a delay in the introduction of legislation to convert the watchdog into ARGA was “the most important risk” facing the organisation in the short term.

The regulator has hired hundreds of staff since 2019 in anticipation of its conversion into ARGA and has agreed with the Big Four that they will “operationally separate” their audit and non-audit divisions by 2024 following concerns over conflicts of interest.

Roger Barker, policy chief at the Institute of Directors, said it was important to establish the new body as quickly as possible. “It is not satisfactory for the FRC to be in limbo for so long as such a key part of the government’s regulatory framework. It is time for reforms to move ahead.”

The government said it would publish its plans “in due course.”

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