FRC CEO: cost makes UK SOX “key political decision”

Proposals for new internal control reporting requirements in the style of the US’ Sarbanes-Oxley model (SOX) may be rejected by government ministers due to prohibitive costs that outweigh the benefits, warned Sir Jon Thompson, CEO of the Financial Reporting Council (FRC).

Following a series of government-backed reviews into the UK’s audit landscape, the FRC is currently working with ministers to provide an official feedback statement addressing a series of proposals outlined in a BEIS whitepaper in 2020.

The final decisions of this process will determine which of the proposals become primary and secondary legislation, which get delegated to the regulator, and which get dropped altogether. This is expected to be published by the end of 2021.

“It’s absolutely a political decision – it’s as simple as that,” said Thompson, addressing a conference held by the ICAEW on Monday.

“We are very much in favour of it, but it’s probably the key political decision of this package because of the costs of it,” he added. “I also believe that ministers will consider very carefully the assessed administrative cost of reporting on internal controls against the benefit of the reforms.”

Despite concerns around how ministers will perceive the UK SOX proposals, Thompson goes on to argue that due to the rising interest in such measures, it should still be straightforward to implement them on some level.

“Whether ministers push ahead with the legislative change on UK SOX or not, I believe there is rising interest in assurance, internal control and corporate governance,” he said.

“Even if legislation is not passed in this area, it will be relatively easy for us to raise the bar further with revisions to the corporate governance code, or for us to include reporting on internal controls in minimum standards for audit committees.”

Thompson went on to outline a number of proposed changes that he believes will be brought into effect following the review process. These include stronger supervision of corporate reporting by the regulator, further clarification on the closure of distributable profits, and stronger reporting by companies around the risk of material fraud.

“I believe that the responses to the white paper showed considerable support for the other changes, and I would expect to see some changes in corporate reporting being proposed,” he said.

Thompson also confirmed that the FRC will soon publish a 19-point framework outlining what constitutes high quality audit and practice.

According to the BEIS whitepaper, the UK SOX regime would broadly entail stricter reporting on how a company’s internal control and risk management systems function.

The whitepaper outlines three options for this: an explicit directors’ statement about the effectiveness of the systems; a requirement for auditors to report more about their views on the effectiveness of the systems; or a requirement for auditors to express a formal opinion on the directors’ assessment of the effectiveness of the internal control systems (the most akin to the US SOX model).