The Draft Audit Reform and Corporate Governance Bill – landmark legislation in the making?

Amongst the 40 laws the government announced in the King’s Speech on 17th July 2024, a draft Audit Reform and Corporate Governance Bill (the Bill) was proposed. It is being hailed as ‘landmark legislation’ that will reshape the landscape for accountants, auditors and directors across the UK. A pledge that the Bill will address longstanding concerns about audit quality and corporate failures, with the objective of reinvigorating depleted trust and confidence in the governance and transparency of UK companies.

What is being proposed and why?

Currently, directors of a company making incorrect financial statements can only be held accountable by the regulator if they are members of an accountancy body. The Bill will change this and the accountability net will be widened. The King’s speech stated that it is “important that all directors in the UK’s most significant companies face consequences if they neglect their duties in respect of financial reporting, so the bill will allow for this.”

 It is proposed that a revamped regulator will be created, the Audit, Reporting and Governance Authority (the ARGA), in place of the Financial Reporting Council.

The Bill will extend Public Interest Entity (PIE) status to the largest private companies and thus make sure the audits of those important businesses are high quality and that they are rigorously scrutinised to ensure any early warnings of financial problems are uncovered.

The ARGA will have expanded powers to investigate, tackle bad reporting and sanction directors, the latter certainly not being reserved for those that are members of an accountancy body. It will therefore see all directors of the UK’s most significant companies face sanctions if they fail in their financial reporting duties.

The aim is to ensure better transparency from large corporates which, in turn, will assist in avoiding corporate failures and the inevitable jobs losses associated with corporate collapse, the latter being central to delivering a secure economy.

The Aim

It is hoped that if audit and corporate governance are strengthened, this will provide investors, employees and consumers with greater confidence in the health and longevity of UK companies. More reliable audit information will also inform lending and investment decisions, ensuring that the best credit risks are supported, not the worst.

The Catalyst

Reform has been long awaited. Reference was made to the 11,000 jobs lost following the BHS collapse, Carillion’s 30,000 unpaid subcontractors, £1 billion of debt and at least a £500 million pension deficit. All of the above are doubtless significant catalysts for the requirement for change and proposed reform. It is noteworthy however that the references to BHS and Carillion (and their fines) were in the context of auditing failures, as opposed to criticism of directors duties or sanctions.

Conclusion

The Chartered Institute of Internal Auditors has heralded the Bill as “long-awaited legislation that is vital to restoring trust in audit and corporate governance”.

 It is certainly a positive step with the objective of driving a more secure economy. We universally await that change with open arms. On the flipside, however, it will inevitably result in greater caution and potentially risk the reticence of directors in taking on those roles in large corporates if the sanctions, accountability and liability are heightened in equal measures.

The tightening of restrictions on company directors echoes certain principles contained in the judgment handed down in the case of Wright and Rowley, BHS & others – v – Chappell and others [2024] EWHC 1417 (Ch) (the BHS case).

In this widely publicised case, the High Court found the former BHS directors to be in breach of their duties and personally liable despite taking professional advice. The BHS case serves as a stark reminder that directors’ duties remain their duties and directors need to ensure that they are fully informed of the affairs and dealings of the company, notwithstanding the significant input and advice from professional advisers they may receive at regular intervals along the way.