Called to Account: Proposed Overhaul of the UK’s Audit and Corporate Governance Regime

Called to Account: Proposed Overhaul of the UK’s Audit and Corporate Governance Regime​

The Story

The Government has unveiled a 232-page white paper containing reform proposals in relation to the UK’s audit and corporate governance regime (Financial Times). Fuelled by the high-profile collapses of BHS, Carillion, and Thomas Cook, the proposals are aimed at “restoring trust in audit and corporate governance” (GOV.UK). The separation of the auditing and consultancy arms of the Big Four (KPMG, EY, Deloitte, PwC) has been recommended, in order to avoid conflicts and strengthen the quality of audits. In terms of corporate governance, the proposals would expand the scope of directors’ responsibility. Directors would be required to personally vouch for the accuracy of company accounts, and face tough sanctions if they fail to do so. Moreover, mandatory ‘clawback’ provisions in directors’ contracts would render them liable to repay bonuses if they failed to protect customer and employee interests. A new regulator, the Audit, Reporting and Governance Authority (ARGA), is already set to replace the Financial Reporting Council (FRC); the ARGA would have a pronounced role in implementing, overseeing, and enforcing the proposed measures.

What It Means For Businesses and Law Firms

The white paper has been largely well-received by audit professionals and business groups, but business costs associated with the reform proposals have been estimated at £430 million. The staggering estimate is partly due to plans to expand the definition of ‘public interest entities’, so that the proposed measures would apply to “larger private groups, Aim-listed companies and, potentially, public sector bodies” (Financial Times). The large-scale raise in standards is meant to offer a more effective shield against corporate disasters.

The separation of the audit and consulting arms of the Big Four would amount to an infrastructural shake-up which might, in turn, prompt the firms to dive deeper into the legal services market (Financial Times). Deloitte has recently acquired British law firm Kemp Little, in a move that may soon be mirrored by its counterparts. However, given the overarching purpose of the reform proposals, the Big Four would likely be precluded from offering legal services to audit clients and, consequently, from pursuing their strategy of becoming ‘one-stop-shops’ for clients. Still, law firms would be faced with pressure to become more competitive solely by virtue of new players’ movements to double down on their respective positions in the legal market.

At the same time, an overhaul of the magnitude proposed by the white paper would see law firms assisting an increasing number of clients in transitioning and adjusting to the new regime. The proposed introduction of tougher sanctions for non-compliance is equally significant; law firms would likely be called upon to carry out periodic compliance checks for clients, or liaise with the ARGA on their behalf. Law firms with well-established expertise in the area will reap the benefits, especially those with Tier 1 corporate governance practices, such as Allen & Overy, Baker McKenzie, and Linklaters (The Legal 500).

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