The UK’s new Labour government has announced an Audit Reform & Corporate Governance Bill that will pave the way for a new accounting regulator to replace the Financial Reporting Council (FRC).

The Audit, Reporting & Governance Authority (ARGA) was announced in the King’s Speech, with the aim of strengthening audit and corporate governance. It will also see all directors of the UK’s most significant companies facing sanctions if they fail in their financial reporting duties.

The FRC welcomed the news. “There are serious gaps in the regulatory toolkit that have long been identified as being in need of reform so we can act fully in the public interest and support growth and the ability of companies to attract the capital they need,” it said.

“It shows that ministers have listened to the profession and understood the value in a robust and modern corporate governance and audit regime.”

ICAEW

ICAEW CEO Alan Vallance wrote to the Prime Minister and Business and Trade Secretary advocating for the establishment of ARGA, which will have a wider remit than the FRC.

“To see that it made the speech … that the government has fully committed to reforming audit and corporate governance, is extremely heartening. It shows that ministers have listened to the profession and understood the value in a robust and modern corporate governance and audit regime,” ICAEW said.

The bill should ensure more robust and rigorous scrutiny of large companies by auditors. The intention is to prevent the repeat of disastrous corporate failures, such as retailer British Home Stores, which led to the loss of 11,000 jobs, and the demise of construction company Carillion, which left 30,000 subcontractors unpaid.

Corporate governance

The Carillion incident led to government proposals in March 2021 on reforming the UK’s audit and corporate governance framework. Those proposals were later withdrawn after consultation with companies raised concerns about imposing additional reporting requirements and how this would place a burden of red tape on businesses.

Directors of a company making incorrect financial statements can currently only be held accountable by the regulator if they are members of an accountancy body.

“EY has consistently advocated for a stronger regulator and enhanced director accountabilities and we are pleased to see audit and corporate governance reform return to the legislative agenda,” Hywel Ball, Managing Partner, EY, said.

“The UK’s attractiveness as an investment destination, international competitiveness and economic growth depend on the implementation of smart, considered regulation. Initial proposals were drafted several years ago and will need to be updated to reflect the current UK market, so we look forward to seeing further details once they are released.”

But some say the bill will make little difference.

“[The bill] won’t improve audit quality. Regulators will remain dominated by big firms/corporations … Companies will continue to hire, fire, and pay auditors. No change to auditor accountability,” Prem Sikka, Professor, University of Sheffield, said.