Our Team

STA's Team of Lawyers in Abu Dhabi, Bahrain, Doha, UAE, Luxembourg, Moscow, RAK, Sharjah, and Singapore. Find a Lawyer. ..

Read more information

Legal Update: Government white paper: Restoring trust in audit and corporate governance

Legal Update: Government white paper: Restoring trust in audit and corporate governance

The government issued its long-awaited white paper on restoring public confidence in audit and corporate governance yesterday. The government's goal is simple: to increase the consistency, authenticity, and transparency of information published by the largest corporations.

The proposals, which were prompted by a number of corporate failures, like Carillion, Thomas Cook, BHS, and Patisserie Valerie, as well as long-standing concerns about a lack of competition and resilience in the statutory audit market, take forward the majority of the recommendations of three government-commissioned independent reviews: the Review of the Financial Reporting Council (FRC) led by Sajid Javid; the Review of the Financial Reporting Council (FRC) led by Sajid Javid; and the Review

In its 233 sections, the consultation involves important, far-reaching, and, in certain instances, divisive changes, as well as 98 consultation queries. As a result, the regular time for submitting responses has been expanded to 16 weeks and will expire on July 8, 2021.

The government has issued an effects report, a compilation of stakeholder feedback to the government's original consultation on the CMA's Market Analysis recommendations, and a summary of how each of the three reviews' 150-plus recommendations were discussed in the White Paper or by FRC intervention.

Proposals for headlines include:

Internal management, dividends, and resource protection are all duties of the board of directors.

  1. Strengthening the disclosure and attestation criteria for dividends and capital maintenance in order to guarantee that payments should not place a business in financial distress. Directors should be allowed to report that every potential dividend is beyond known distributable funds which would not, in their view, jeopardize the company's solvency for the next two years.
  2. requiring directors to perform an annual analysis of internal management efficacy and to include a declaration regarding that effectiveness in their annual report, with that statement theoretically open to scrutiny.
  3. We're looking for feedback on plans to grant the additional regulator (details below) new powers on how businesses measure distributable assets.

For Public Interest Entities, corporate transparency on resilience, assurance, and payment processes is needed (PIEs):

  1. Requiring an annual Resilience Statement that explains how the board of directors views the company's outlook and aims to resolve threats to the industry in the short, medium, and long term, including climate change risks. Current going concern reports and feasibility statements will be "incorporated and built on."
  2. Requiring the release of an Audit and Assurance Policy that describes the directors' approach to finding internal and external assurance of the details they send to shareholders (over a rotating three-year "forward look"), including any external assurance expected outside the framework of the annual formal audit.
  3. Asking for feedback about how details on supplier reimbursement standards and procedures may be used in annual reports.

Increasing the oversight of corporate reporting:

  1. Providing the Audit, Reporting and Governance Authority (ARGA), the FRC's successor, with the authority to direct improvements to business accounts without the requirement for a court order (as is the case currently).
  2. Extending ARGA's assessments to cover the complete fiscal report, covering corporate governance documents, directors' remuneration, and audit committee findings, as well as discretionary items including the CEO and chair's reports.          

Strengthening the ability of directors to be held accountable:

  1. Increasing ARGA's investigation and regulatory powers in situations where directors of PIEs neglect legislative responsibilities pertaining to corporate reporting and audit.
  2. To offset the risk of punishing loss, executive directors' remuneration agreements can be strengthened with "malus and clawback" provisions.

Intent and reach of audits - bridging the audit expectations gap:

  1. Developing new overarching principles for auditors to reinforce common practice by requiring them to incorporate a broader variety of evidence while shaping audit decisions, including whether financial statements provide a "real and fair view."
  2. Adding additional requirements for all auditors and directors in terms of detecting and preventing content theft.

Shareholder involvement and supervision by the audit committee:

  1. Giving ARGA the authority to impose additional conditions on audit committees of FTSE 350 organizations in terms of auditor appointment and supervision.
  2. Allowing owners in publicly traded companies to suggest new areas for focus within the framework of a company's external audit.
  3. Following the resignation or firing of a PIE's auditor, improved contact with shareholders is needed.

Improving audit industry competitiveness, choice, and resilience:

  1. To improve option and competitiveness in the FTSE 350 sector, a "controlled mutual audit regime" was created, which falls short of a complete joint audit. If this may not succeed, companies will be limited in the amount of audits they conduct in this category.
  2. Separating the audit and non-audit branches of such auditors on an organizational rather than institutional basis.
  3. Creating ARGA, rendering it accountable to Parliament and granting it considerable administrative enforcement authority, as well as making it liable for authorizing the formal auditors of PIEs.

Scope and timing:

The government aims to introduce audit legislation in stages, acknowledging the need of reform but also the need to manage new requirements on companies. Measures that may not have a significant influence on businesses, such as the creation of ARGA, can be implemented more rapidly. Changes that have a direct effect on companies may be phased in over time, with all needing interim plans. Larger firms, especially those with a premium listing, are likely to be subject to new criteria ahead of others, while emerging growth companies could be exempt from any of the new requirements for a period of time after an Initial Public Offering to ensure that they do not act as a barrier to pursuing a listing.

PIEs - actually, credit agencies, insurance undertakings, and others with shares accepted to restricted exchanges, such as the London Stock Exchange's main sector - are the subject of much of the plans. To ensure only the most economically important firms in the UK are caught, the government is recommending that the spectrum of this main category be expanded to cover the very biggest private businesses (one alternative sets the bar as low as those of more than 500 staff and a revenue of more than £500 million) and Target companies with a market capitalization of more than €200 million.

The timing of the amendments is unavoidably ambiguous: "as Parliamentary time permits."

There are major changes. Everyone would need to be carefully analyzed separately and together, especially to ensure there are no adverse effects and that the advantages exceed the costs. It remains to be seen if they regain faith in company and auditing, as well as giving investors the courage to invest in the UK, as the government hopes.