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January 3, 2022updated 31 Jan 2022 4:28am

Scaling back audit and governance reforms is a missed opportunity

By Zoya Malik

High hopes were pinned upon the audit reform that were expected to restore trust and in corporate governance and audit. So why is the UK planning instead to scale back on its planned and awaited corporate governance reforms?

Anca Thomson, partner and specialist corporate and commercial lawyer at Excello Law, will examine the state of the audit market and how CFA UK and the Corporate Reporting Users’ Forum has long backed a UK equivalent of the US “Sarbanes-Oxley Act”, which was implemented in 2002 requiring directors to sign off company internal controls over financial reporting. Sarbanes-Oxley is a well-run balancing tool in the US regulatory system, and it has proven very efficient since its introduction.

Furthermore, the market is still awaiting the finer details regarding the UK’s new auditing regulator, Audit, Reporting and Governance Authority, but it will have authority over fewer companies than initially envisaged.

Anca will explore whether the cost of implementation could be an issue, however, she will also argue that on the other hand and in the context of benefits for the general public, the cost is not that high.

Furthermore, the UK’s eagerness to be open for business post-Brexit and post-pandemic could be some of the driving forces behind the scaling back of governance.

The milder envisaged approach seems to be obliging the directors to make an annual statement about the effectiveness of the controls into the UK’s corporate governance code. These will be harder to enforce and companies can opt-out and not comply as long as they explain why.

Anca will also point out that it is also bizarre that only the premium listed companies will be required to comply when these entities already have strong controls and governance in place. The Government does want to include within the new auditor’s remit oversight of large private companies, but even then some of these businesses may fall outside the scope of regulation.

Anca will argue this is a missed opportunity as good governance does not need to be that cumbersome. In the long term, companies can seek to improve the accountability of internal control rather than emphasising a reliance on external auditors.

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