The new Labour Government will press ahead with reforms of company audits and corporate governance with plans for a more powerful watchdog under long-awaited legislation unveiled in the King’s Speech.
The draft Audit Reform and Corporate Governance Bill will pave the way for a new accounting regulator – the Audit, Reporting and Governance Authority – to replace the Financial Reporting Council (FRC).
The new watchdog will have greater powers to tackle bad financial reporting and help build trust in British firms, seen as being crucial to helping avoid corporate failures and protect jobs, as well as encouraging investment in UK companies.
The UK-wide legislation has been long delayed and was controversially omitted from the King’s Speech last year.
The FRC said at the time that the delay was “disappointing”, while also announcing it would significantly row back on earlier aims to overhaul the UK corporate governance code, ditching more than half of the 18 proposals it had previously set out.
The new Bill set to be enacted will look to ensure more robust and rigorous scrutiny of large companies by auditors in a move that will look to prevent the repeat of disastrous corporate failures, such as BHS, which led to the loss of 11,000 jobs, and the demise of construction giant Carillion, which left 30,000 subcontractors unpaid.
It will also see all directors of the UK’s most significant companies face sanctions if they fail in their financial reporting duties.
Directors of a company making incorrect financial statements can currently only be held accountable by the regulator if they are members of an accountancy body.
The FRC welcomed the draft Bill as a “positive direction of travel”.
FRC chief executive Richard Moriarty said: “There are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need.
“Without these changes we are the regulatory equivalent of being a sheriff for only half the county and with a weaker powers than are needed.
“We will work with the Department of Business and Trade as it brings forward this draft legislation, while continuing to use our existing powers to deliver good standards of corporate governance, financial reporting and audit, and fulfilling our remit to support growth across the UK.”
Accounting groups have increasingly been calling for an overhaul of auditing regulation and oversight, with the FRC having hit firms with record fines for their accounting failures following the demise of firms such as Carillion.
Alan Vallance, chief executive of the Institute of Chartered Accountants in England and Wales, said: “Reliable, trusted reporting by companies is fundamental to investor confidence which in turn is key to economic growth and stability.
“This long-awaited reform will not only reduce the risk of disorderly business failure but will contribute to the transition to net zero.”
Gavin Hayes, head of policy and public affairs at the Chartered Institute of Internal Auditors, added: “Ensuring the audit regulator has the legal powers it needs to do its job effectively is vital to restore trust in the audit and corporate governance system.”
