Key elements of the Audit Reform Bill include

• An expansion in the definition of Public Interest Entity (PIE) subject to enforcement by ARGA, to include (very) large unlisted companies where they have 750 employees and £750m+ annual turnover.

• ARGA to have powers to investigate and sanction directors of large companies for breaches of duties relating to corporate reporting and audit.

• FTSE350 companies will be required to appoint an auditor outside of the ‘Big Four’ or to allocate a certain portion of their audit to a smaller challenger firm. If necessary, the Business Secretary will be able to introduce a market share cap on firms.

These reforms have been criticised as ‘watered down’, so it’s worth asking what was missing?  Well, the more radical notions such as adopting a more stringent regime like Sarbanes-Oxley in the US or breaking up the Big Four have not found favour.

Particular Implications for Accountants and Directors

Of very great significance is ARGA’s proposed powers to investigate and sanction directors of PIEs. Directors of PIEs will face sanctions such as fines if for example legal duties requiring openness with auditors are breached.

Of potential significance is the proposal for regulators to consult on amending the Corporate Governance Code to increase scrutiny around the decision to declare dividends and bonus clawbacks which currently cause confusion as to the circumstance where an executive director’s bonus would be withheld or clawed back.

Audit scope will now cover how PIEs assure the quality and reliability of information in their annual reports outside the financial statements, including on climate, risk and internal control.

The FRC’s CEO, Sir John Thompson, criticised the watered-down reforms as a “missed opportunity” and ICAEW Chief Executive, Michael Izza, has voiced concerns that the reforms have a “half-hearted and lop-sided feel”, noting that the professional accountancy bodies are central to driving up standards and the establishment of ARGA appears to overlook their contribution.

In our view that criticism is not really justified.  The more stringent a financial reporting regime, the greater the compliance burden for corporates.  Will capital flow to the UK post-Brexit because of a manageable compliance burden, or because of gold-plated corporate reporting?  Does a stringent system of internal controls prevent corporate misfeasance, or just give a false sense of security?  There are no solutions here, only trade-offs.  And whether a trade-off is a beneficial one is only knowable – if at all – with time.

For now at least, it is promising that after years of discussion and consultations, the waiting is nearly over, the framework for embedding these reforms finally appears to be advancing.