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UK set to ditch some corporate governance reforms after business backlash

The UK is set to ditch plans to use legislation to force directors to take greater responsibility for company accounts after a fierce backlash over the costs of proposed boardroom rules.

Officials are close to finalising a reform package that will mark the largest overhaul of British audit and corporate governance for generations following high profile scandals, including at outsourcer Carillion and retailer BHS.

However, officials are expected to rein in some of the most controversial plans in favour of a more “business friendly” regime. Executives have warned that additional costs would make it less attractive to establish and keep businesses in the UK at a time when ministers are keen to foster a post-Brexit economic recovery.

Officials plan to tighten company internal controls by insisting that directors make an annual statement about their effectiveness. But a proposal to use legislation to require directors to sign off on companies’ internal controls over financial reporting, modelled on the US’s Sarbanes-Oxley Act, is expected to be dropped.

A similar provision is instead expected to be included in the UK corporate governance code, according to people familiar with the revised proposals, which would carry less weight and be more difficult to enforce.

The code applies only to companies with a premium listing, meaning fewer businesses would be included in its scope. Companies can also ignore these requirements as long as they explain why. This regime is unlikely to have included companies such as privately owned BHS and Aim-listed Patisserie Valerie, two of the most prominent corporate scandals in recent years.

Ministers are also planning to adopt the narrowest definition of which companies should fall within the expanded remit of the new audit regulator, the Audit, Reporting and Governance Authority (ARGA).

The reforms will extend the definition of so-called “public interest entities” to include about 1,000 extra companies, according to people familiar with the plans, while an option to double the number of PIEs to about 4,000 will be dropped.

The extended remit is still expected to include limited partnership and private companies with revenues of more than £500m and over 500 employees, according to those people, bringing the largest accounting and law firms within its scope.

A decision not to include director responsibility for internal controls in legislation would be a blow to accounting firms, which have been criticised for failing to raise red flags before corporate scandals erupt but argue that ultimate responsibility lies with company management.

Michael Izza, chief executive of chartered accountants body ICAEW, said that a failure to strengthen the rules around internal controls would undermine the wider package of audit reforms, the burden of which would instead fall on the accounting profession.

“If any one of the pillars of this reform programme is weakened then the whole package is at risk of falling down.”

The proposals are also unlikely to force companies to use external auditors in providing assurance over internal controls, according to people familiar with the plans, again putting it at odds with the stricter audit regime in the US. 

However, the plans will bring in other elements of Sarbanes-Oxley, which require management of public companies to assess and report annually on the effectiveness of internal controls and procedures for financial reporting.

The plans remain subject to change until signed off by business secretary Kwasi Kwarteng. The UK business department said that no decisions had been taken. “Our consultation on audit reform set out a wide range of proposals to restore public trust in the way big businesses are run and scrutinised.”

ARGA will replace the Financial Reporting Council as part of the reforms. It will enforce new rules governing company audit committees as well as fraud and directors will come under its remit.

The authority will also become the “system leader” for auditing local authorities, a sector where an increasing number of challenging financial issues have emerged in recent months.

Officials are also preparing to give ARGA the power to implement “managed shared audits”, which would require FTSE 350 companies audited by one of the Big Four — Deloitte, EY, KPMG or PwC — to hand some work to a smaller rival, the people said.

But the business secretary is also expected to be given the power to cap the market share of any single audit firm if this proposal does not deliver change, the people added.

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