Daily Management Review

Britain’s New Proposal To Significantly Change Running And Auditing Of Firms


Britain’s New Proposal To Significantly Change Running And Auditing Of Firms
Following the collapse of retailer BHS and builder Carillion, the British government has proposed to weaken the market dominance of the “Big Four” auditors while making the directors of the company responsible personally for failing to spot fraud.  
If companies were to collapse or serious failings were revealed, the directors of companies would have to repay their bonuses. The new proposed regulations also mandate that the dividends and bonuses will also have to be stopped by companies if there is not enough cash with companies – which was the reason for the Carillion collapse.
The majority of recommendations that were made in the three government supported reports on audit market competition, regulation and corporate governance were included in the proposals which have been put for a public review and consultation for four months.  
“It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms,” United Kingdom’s business minister Kwasi Kwarteng said in a statement.
Companies are already implementing some of the proposals voluntarily such as the operational separation of audit and more lucrative consultancy work at PwC, Deloitte, KPMG and EY - the “Big Four” audit companies that dominate auditing work for blue-chip UK companies.
An internal transformation to turn itself in a more powerful Audit, Reporting and Governance Authority or ARGA is already on at the Financial Reporting Council, which made the proposal and which has been criticised by British law makers of being too timid in regulating auditors.
The UK government proposals did not include the recommendation of the UK Competition and Markets Authority of joint auditing work being conducted by smaller audit firms and the “Big Four” and instead proposed that smaller audit companies need to undertake a meaningful portion of a big company audit.
That would pave the way for the smaller firms such as Mazars, Grant Thornton and BDO to gather enough experience and expertise to present a serious challenge to the Big Four in the near future. The government however said that the Big Four will face caps on market share if this strategy for competition fails.
The proposal wants to set a target of the smaller audit firms being given at least 20 per cent of the total audit fees for FTSE-350 companies within the next five years of the reforms being implemented.
The proposals also contain new reporting obligations for both auditors and directors for detection of and prevention of fraud. Under the proposals, boards at companies will have to make public the control that have been put in place – which is a measure that is similar to the stringent Sarbanes-Oxley anti-fraud safeguards that were introduced in the United States after the collapse of the energy giant Enron.
ARGA would have powers to investigate and punish all company directors.
It was apt that the government was working on finding ways to ensure greater accountability of directors, said the Institute of Directors, but added that the central feature UK corporate governance should remain the collective responsibility of a board.