Audit and corporate governance reforms have been placed on the new UK Government’s legislative agenda. The Draft Audit Reform and Corporate Governance Bill was included on the King’s speech earlier this month, following previous proposals by the Kingman Review (2018), the Brydon Review (2019), and the Competition and Market Authority’s (CMA) statutory audit market review (2019).
These three comprehensive reports made similar recommendations: establishing a revitalised regulator, modernising its powers to investigate and impose significant sanctions, and enhancing the transparency and integrity of the UK’s corporate governance, financial reporting, and audit processes.
CMA Chairman Andrew Tyrie highlighted in his review: “The Government now has three reports to hand. In large part, they come to similar conclusions. Conflicts of interest cannot be allowed to persist; nor can the UK afford to rely on only 4 firms to audit Britain’s biggest companies any longer. Early action will require legislation – hence the CMA’s proposals.”
Since these reports were published, progress has been made, including plans to replace the Financial Reporting Council (FRC) with a new body, the Audit, Reporting and Governance Authority (ARGA).
The current draft bill mirrors the original proposals, and potentially includes:
a. Establishing ARGA, which would have expanded powers to investigate and sanction directors, placing the FRC on a statutory footing. However, it is anticipated that it may take another two years before ARGA is fully operational.
b. Extending Public Interest Entity (PIE) status to large private companies, subjecting them to more rigorous audit requirements.
c. Removing unnecessary rules for smaller PIEs to reduce the regulatory burden.
d. Introducing a new regime to oversee the audit market, protecting against conflicts of interest, building resilience in the sector, and reducing the dominance of the Big Four.
The Conservative Government announced plans for ARGA in 2019 and published detailed proposals in 2021, which were expected to be fully implemented by 2023, before being dropped from the King’s Speech in November 2023.
ARGA, as currently envisaged, would have enhanced powers and responsibilities, including oversight of major audit firms, setting corporate governance standards, and enforcing compliance with auditing and corporate reporting requirements.
Detailed proposals are ready and should serve as the basis for legislation, similar to the previous draft bill, allowing for swift progress. The main challenge is prioritising this within a crowded legislative timetable, as the King’s Speech outlined 40 separate bills. Realistically, not all can be passed in the current parliamentary session.
Former FRC chair Keith Skeoch welcomed the proposed bill, stating: “What’s really important is that the FRC are given the statutory powers to ensure the transformation into ARGA happens. The devil of course will be in the detail.”
However, ARGA’s role and the scope of its powers may well evolve as the new Government seeks to make its mark on the work previously done by the Office of the Parliamentary Counsel. This remains to be seen as the final wording and provisions of the Bill are awaited.
The background briefing note to the King’s Speech can be found here.
Author
Gill Laing is a qualified Legal Researcher & Analyst with niche specialisms in Law, Tax, Human Resources, Immigration & Employment Law.
Gill is a Multiple Business Owner and the Managing Director of Prof Services Limited - a Marketing & Content Agency for the Professional Services Sector.
