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U.K.'s New Labor Government Commits to Strengthening Audit Regulator and Corporate Governance

Within two weeks of taking office, the U.K.’s newly elected Labor government has confirmed its commitment to bolster the audit regulator and enhance corporate governance. Prime Minister Keir Starmer, in Wednesday’s King’s Speech—which outlines the government’s legislative plans for the next Parliament—added the Draft Audit Reform and Corporate Governance Bill to the list of 40 bills the government aims to pass.


U.K.'s New Labor Government Commits to Strengthening Audit Regulator and Corporate Governance

Central to the draft legislation is the government’s plan to transform the existing regulator, the Financial Reporting Council (FRC), into the Audit, Reporting, and Governance Authority (ARGA).


For years, the FRC has faced criticism for being too lenient on the Big Four audit firms, following a series of corporate governance failures, including those of Patisserie Valerie, Carillion, and BHS. Research by the campaign group Audit Reform Lab revealed that auditors failed to raise alarms for three-quarters of British companies that went bankrupt in the last decade. In a 2018 review, former Treasury official John Kingman described the FRC as a “ramshackle house.”


Originally, ARGA was slated to be operational by 2023, but former Prime Minister Rishi Sunak shelved the plans in the King’s Speech last November, casting doubt on whether the regulator would ever materialize, especially after deeming several corporate reporting measures as “burdensome.”


The Chartered Institute of Internal Auditors has stated that the “long-awaited legislation” to improve audit and corporate governance is “vital.” They noted that six years after the collapse of infrastructure firm Carillion in January 2018, which left 30,000 unpaid subcontractors, £1 billion of debt, and at least a £500 million pension deficit, they are “deeply concerned about the pace of reform.”


Nick Graves, head of corporate at law firm Burges Salmon, remarked that the uncertainty “has now been removed,” highlighting that the background notes to the King’s Speech indicate the regulator will have more powers and greater scope.


Company Formation

The draft legislation includes four key changes. First, ARGA will have a broader remit by extending “public interest entity” (PIE) status to the largest private companies, subjecting them to high-quality audits. Second, unnecessary rules on smaller PIEs will be eliminated by “cutting requirements that are disproportionate.” Third, ARGA will gain powers to investigate and sanction company directors for serious failures related to their financial reporting and audit responsibilities, ensuring “there are consequences for putting forward dodgy accounts.” Currently, directors can only be sanctioned by the regulator if they are members of an accountancy body. The new bill will hold all directors accountable.


Fourth, the bill will introduce a regime to oversee the audit market, protect against conflicts of interest, and build resilience. Richard Moriarty, FRC chief executive, said that “without these changes we are the regulatory equivalent of being a sheriff for only half the county and with weaker powers than are needed.”


Experts have generally welcomed the proposed reforms. Mike Suffield, director of policy and insights at the Association of Chartered Certified Accountants, commented in a blog post, “the shift of the FRC to ARGA as a clear independent watchdog will strengthen the oversight of audit quality so that audit firms can be held properly to account, introducing changes that have been needed since the collapse of Carillion in 2018.”


Andrew Howell, head of the U.K. disputes and investigations team at law firm Taylor Wessing, said, “Corporate governance reform is long overdue, and it is a positive sign to see this on the new legislative agenda. The key will be in the detail and how the government balances oversight of corporate conduct and proportionate audit reform without bringing in excessive red tape.”


Frances Coulson, head of insolvency and restructuring at law firm Wedlake Bell, echoed a note of cautious optimism, noting that no timeline for the legislation has been set. “The new government already has a busy legislative agenda, so there may yet be a wait for more detail, and of course real change depends on the effectiveness of delivery,” she said.

By fLEXI tEAM

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