Corporate governance continues to be a key issue both in the UK and more globally with companies such as Carillion, Wirecard and FTX all collapsing in part due to major failings in governance and audit procedures. It is therefore not surprising that strengthening governance procedures is seen as an important area of focus for the UK government. In May last year, the government published its response to its White Paper regarding restoring trust in audit and corporate governance. In this blog we will look at the proposed reforms which are intended to improve the strength and integrity of corporate governance and audit in the UK.

Public Interest Entities

One of the main reforms is to expand the current definition of Public Interest Entities (PIEs). At present only companies listed on a regulated market, banks/building societies and insurance firms fall within the definition. The reforms propose to expand this scope so that private companies and limited liability partnerships will be PIEs if they meet the criteria of having over 750 employees and an annual turnover of over £750 million (the 750:750 test). AIM listed companies will only be PIEs if they meet the 750:750 test.

A New Regulator

One of the primary reforms proposed by the White Paper is to create a new regulator, the Audit, Reporting and Governance Authority (ARGA). ARGA will replace the Financial Reporting Council (FRC). ARGA will be given stronger powers compared to the FRC. These include:

  • formalised responsibility for overseeing accounting and audit professions;
  • a larger role in auditor registration; and
  • more powers to tackle breaches of company directors' duties relating to corporate reporting and audit.

ARGA will have a proactive role in supervising and monitoring corporate reporting. ARGA will be able to direct changes to company reports and accounts without the need of a court order. Further, AGRA will be able to review the entirety of an annual report including corporate governance statements, director's remuneration and audit committee reports.

        Corporate Reporting

        The government has proposed the introduction of a new statutory resilience statement and an audit assurance policy for PIEs.

        The resilience statement will require the directors of a PIE to state matters which could be a material challenge to the company over the short, medium and long term and how they came to decide on the materiality of the matter. This will include an assessment on:

        • the company's ability to deal with business disruption;
        • the sustainability of the company's dividend policy; and
        • the impact the company's business model has on climate change, to the extent not already covered in statutory reporting.

        The audit assurance policy will cover a range of issues including:

        • setting out the internal audit and assurance process of the company, including how management conclusions are verified;
        • describing the tendering process of external audit services; and
        • setting out how the company intends to seek independent assurance over any part of its resilience statement.

        Dividend and Capital Maintenance

        The government is also proposing to introduce reform in relation to dividend and capital maintenance for PIEs. It will now be a requirement for PIEs to:

        • provide a narrative around the board's long-term approach to the amount and timing of returns to shareholders and how this distribution policy has been applied in the reporting year;
        • disclose their distributable reserves or a "not less than" figure if providing an exact amount would be impracticable or involve disproportionate effort; and
        • provide a statement by the directors about the legality of the dividends and assurances that the dividend will not impact on the solvency of the company.

        What do the reforms mean for your business?

        While these reforms only apply to a relatively limited group of companies, it is important to be aware of the government's increased focus on corporate governance reform. There is always the potential that new reform will be brought in to target smaller entities. Directors of companies, whatever their size, should therefore continue to ensure that corporate governance remains an important focus.

        If you have any questions in relation to the matters discussed in this blog, or wish advice in relation to your business please get in touch with corporate partner David Lightbody, or your usual Brodies contact, who would be happy to assist.


        Emma Greville Williams

        Practice Development Lawyer

        Ian Harvey

        Trainee Solicitor