In the wake of the spate of recent business collapses the Department of Business, Energy and Industrial Strategy (BEIS) has published a White Paper titled “Restoring trust in audit and corporate governance”.
The White Paper is open for consultation until 8 July 2021, and feedback can be submitted directly online via the BEIS website or emailed to [email protected]. The proposals would herald a significant change in corporate governance for an increased number of larger companies, and especially in the accountability of their directors. We have summarised below some of the key proposals relevant to directors.
Directors – company directors would become more accountable. A new regulator, the Audit, Reporting and Governance Authority (ARGA), would take over from the Financial Reporting Council. It would have more extensive enforcement powers for breaches of both existing, and new, directors’ duties, including in respect of company reports and accounts, the duty to approve accounts only if they give a true and fair view and the duty to provide full information to the auditors. Changes to the UK Corporate Governance Code may widen clawback of directors’ remuneration to provide better reassurance against reward for failure.
Directors will also be required to undertake a review of the effectiveness of their company’s internal controls each year and make a statement (as part of their annual report) as to whether they consider them to have operated effectively.
Dividends and capital maintenance – companies would be required to disclose the total amount of distributable reserves in their financial statements. This should provide transparency as to the company’s ability to pay dividends in the future and assist with assessments of the legality of proposed dividends. It is proposed that directors will need to confirm that, in their reasonable expectation, payment of the dividend will not threaten the solvency of the company in the following two years.
Public Interest Entities (PIE) – the audits and auditors of PIEs are already subject to a number of additional regulatory measures. It is proposed that the definition of PIE be expanded beyond those companies which are trading on a regulated market to include large private companies. in order to bring companies which are of public importance within the scope of the wider regulatory measures.
Resilience and assurance reports – directors of PIEs may be required to produce an annual resilience report setting out how they are assessing the company’s prospects and addressing challenges to its business model over the short, medium and long term, including risks posed by climate change. In addition, PIEs would need to publish an audit and assurance policy setting out their approach to seeking internal and external assurance of the information that they report to shareholders.
Should all of the White Paper’s proposals be implemented, they will have a profound effect on the operation and governance of large corporates who will be expected to meet the highest standards of reporting as for listed companies. Alongside providing investors with greater protection and transparency, it is hoped that the reforms will provide greater public trust in the credibility of directors’ reporting and statutory audit.