Business

Britain to shake up how companies are run and audited

Britain set out proposals on Thursday to tighten corporate governance and inject more rigour and competition into audits, a combination it hopes will avoid more company collapses such as the failures of retailer BHS and builder Carillion.

The main proposal are:

AUDIT MARKET

  • Shared audits: auditing is dominated by KPMG, EY, Deloitte and PwC or the “Big Four”. Large companies would have to use a smaller “challenger” auditor such as BDO, Grant Thornton or Mazars, to conduct a meaningful portion of their annual audit
  • Big Four to face cap on their market share of FTSE 350 company audits if competition does not improve
  • Audit, Reporting and Governance Authority (ARGA), a powerful new regulator to replace the existing Financial Reporting Council, could force accounting firms to split operations of audit and consultancy work
  • ARGA would be funded by mandatory levy on industry, with powers to order companies to redo accounts without having to go through the courts
  • New obligations on auditors and directors around detecting and preventing fraud, with the board required to set out what controls they have in place
  • Audit to extend beyond financial results to include wider performance, including key climate targets

CORPORATE GOVERNANCE

  • Directors of large businesses could face fines or suspensions if there were big errors with accounts, hiding crucial information from auditors or leaving the door open to fraud
  • Britain’s Corporate Governance Code amended to add that companies could be expected to write into directors’ contracts that their bonuses would be repaid in the event of collapses or serious director failings up to two years after the pay award was made
  • Large businesses would need to be more transparent about the state of their finances, so they do not pay out dividends and bonuses at a time when they could be facing insolvency – a nod to learning from the Carillion collapse
  • Directors would also publish annual “resilience statements” that set out how their organisation was mitigating short and long-term risks, encouraging their directors to focus on the long-term success of the company and consider key issues like the impact of climate change

NEXT STEP

  • Based on the outcome of a four-month public consultation, the government will bring forward legislation “when parliamentary time allows”