The Government has published a response to its consultation on strengthening the UK's audit, corporate reporting and corporate governance systems.
The long-awaited response outlines the Government plans to tackle Big Four dominance, ban failing auditors and bring large unlisted companies under the scope of the regulator.
The Government will also revamp the UK's corporate reporting and auditing regime through a new regulator.
Effective reporting and auditing ensures investors and the public can assess the health of companies themselves, which is crucial to encourage investment and growth.
The reforms aim to prevent sudden large-scale collapses of more companies like Carillion, which failed with debts of £7 billion and sparked a backlash against the UK's accounting and audit system.
Minister for Corporate Responsibility Lord Callanan said:
"Collapses like Carillion have made it clear that auditing needs to improve, and these reforms will ensure the UK sets a global standard.
"By restoring confidence in audit and corporate reporting we will strengthen the foundations of ‘UK plc', so it can drive growth and job creation across the country."
‘A new, stronger regulator'
The current Financial Reporting Council will be replaced by a "new, stronger regulator" - the Audit, Reporting and Governance Authority.
The regulator will have tougher enforcement powers and will be funded by a levy in industry to ban failing auditors from reviewing large companies' accounts.
Unlisted companies with over £750 million annual turnover and more than 750 employees will come under the scope of the regulator, rather than just those listed on the stock exchange.
Federation of Small Business national chair Matin McTague said:
"It's good to see the Government grasping the nettle on audit reform.
"As legislation is drawn up, the key to success will be making corporate audit committees directly responsible for reporting on payment and wider supply chain practice."
Smaller businesses
The Government also announced it will review wider reporting burdens on large and small businesses including those from retained EU law.
A Government spokesperson said:
"This will help the UK's companies grow whilst bolstering investment, as we take advantage of Brexit freedoms to regulate in a more proportionate and
agile way that works for British businesses."
In particular, the Government will update the definition of micro-enterprises after suggesting the old EU directive may be causing SMEs to spend time and money on accounts to a level of detail only needed for larger companies.
The Government will also consider the reporting requirements on smaller public interest entities to help growing firms, and review whether there are unnecessary restrictions on remunerating directors in shares.
No extra regulations will be added to smaller businesses, the Government said, as the overall focus of audit reform is on the UK's largest companies.
However, companies will be required to conduct part of their audit with a challenger firm to curtail the dominance of a select few auditing firms.
Other changes
Under the new rules, directors in charge of large companies will face sanctions if they breach their legal duties to be open and honest with auditors about the state of their firm's finances.
The Government also said it will act to address ‘rewards for failure' - where bosses pocket bonuses despite their company collapsing.
The new regulator, ARGA, will also be given the power to make big audit firms keep their audit and non-audit functions separate.
Talk to us about your audit.
