During the King’s Speech in July 2024, which set out the government’s legislative agenda for the upcoming parliamentary session, a new bill was proposed, to introduce audit and corporate governance reforms which would help to streamline the consequences for directors if they neglect their directors’ duties in respect of financial reporting.
The new Audit Reform & Corporate Governance Bill (the “Bill”) represents a significant step towards controlling poor financial reporting and provides transparency and further accountability in the corporate sector. The Bill replaces the Financial Reporting Council (“FRC”) with a new regulator, the Audit, Reporting and Governance Authority (“ARGA”). The purpose of the ARGA is to uphold standards and statutory obligations of company directors.
The ARGA will serve to provide for other important changes such as:
- Extending the definition of Public Interest Entity (“PIE”), to extend to larger private companies to make sure the audits of those businesses are of high quality;
- Removing strict and unnecessary rules on smaller PIEs, so that they are no longer disproportionate;
- Stronger powers to investigate and sanction company directors for any serious breach in relation to their financial reporting and audit responsibilities; and
- The power to oversee the audit market as a whole to ensure there is no conflicts of interest at audit firms.
The main purpose of the Bill is to ensure that investors, employees and consumers have an accurate picture of the health of a company, by the use of greater scrutiny of their audits and financial reporting.
It should be noted that the Bill has been put forward as a ‘Draft Bill’, meaning it may not be published as a Final Bill, as it requires further background work and consultation. However, as the briefing notes state, The Chartered Institute of Internal Auditors said the following:
“This long-awaited legislation is vital to restoring trust in audit and corporate governance. The need for audit reform is now urgent. In recent years we have seen a series of high-profile corporate collapses linked to audit and governance weaknesses.”
Directors should be aware of the Bill as their current statutory duties (set out in the Companies Act 2006) to exercise reasonable care, skill and diligence will be reinforced, hopefully making directors more accountable in relation to their company’s financial statements and audit controls.
Should you require advice or assistance in relation to the above, please get in touch below with our Commercial Team or contact Cosima Berger or Mark Deans on 01702 338 338.
