Restoring trust in audit and corporate governance

A focus on large private companies

1) Headline view

The Government’s response to the consultation on its White Paper ‘Restoring trust in audit and corporate governance’ has reduced the potential burden on private companies through raising the PIE thresholds, as compared with those in the White Paper; granting exemptions from some requirements for other PIEs and by some simplification of the proposed new reporting requirements.

If the proposals are introduced, for those still becoming PIEs there will, however, be substantial new requirements and directors will be subject to a much tougher regulatory regime. The challenge will be how large private businesses can positively adopt the new requirements in a way that enables them to build a stronger more resilient business rather than them seeing implementation primarily as a compliance exercise. It will also be important for them to plan in good time for likely changes necessary in order that they can make a smooth transition to being a PIE.

2) Size thresholds for private businesses to be PIEs

Private businesses will be PIEs if they have an annual turnover of more than £750m and more than 750 employees globally. This will add around 600 private businesses to the PIE list compared with around 1,000 or 2,000 under the two options set out in the White Paper. For further information please see the New PIE size thresholds and their implications.

3) Significant additional reporting requirements 

Private businesses meeting the size thresholds will be required to meet significant additional reporting requirements related to:

• the Resilience Statement
• Audit and Assurance Policy
• Prevention and detection of fraud
• Dividends and capital maintenance.

The whole of their annual report will be subject to review by the regulator under wider corporate reporting powers. There will both be one-off and ongoing additional resource needs in the finance team to fulfil the new requirements and there may also be a need to strengthen the internal audit function.

The proposed new requirements are discussed more fully in the New reporting requirements for PIEs meeting the size thresholds and ARGA’s proposed regulatory powers.

4) Some exemptions from audit requirements 

Private businesses becoming PIEs under the size thresholds will not be required ot have an audit committee and will not have ot to tender their audit every 10 years or rotate their auditors every 20 years as other PIEs do. With the auditors of PIEs having to register directly with the FRC in future, and be subject to a higher degree of regulation, some of the current auditors of private businesses becoming PIEs may decide they do not wish to be PIE auditors and this may lead in practice to a need to change auditors and possible capacity constraints in the PIE audit market.  

5) Sanctions on board directors  

Directors of PIEs will be subject to investigation and sanctions by the regulator in relation to their responsibilities for corporate reporting and audit. This may lead to some current non-executive directors of large private businesses deciding they do not wish to continue in the role and is certainly likely to require those involved in reporting and audit activities to devote more time to their roles. In addition, it will be important for potential new PIEs to review their board composition and structure to ensure they are ready for their new role more in the public eye.

The proposed new regulatory powers and sanctions regime is set out in ARGA’s proposed regulatory powers and Sanctions against Directors.