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Restoring trust or undermining business confidence? Reform of financial reporting

  • United Kingdom
  • Corporate
  • Financial services disputes and investigations
  • Financial services


The Government has published its long awaited White Paper on financial reporting reform – Restoring trust in audit and corporate governance. The 232 page consultation paper sets out a package of measures aimed at improving a number of aspects of the UK’s audit, corporate reporting and corporate governance systems. The reasons why reform in these areas is needed are well documented, and have been highlighted by high profile insolvencies impacting jobs, pensions and public confidence in UK business.

The White Paper takes account of the initial consultations and recommendations made by the Kingman Review of the Financial Reporting Council (FRC), the Competition and Markets Authority’s (CMA) market study on competition in the audit market and also the Brydon Independent Review of the Quality and Effectiveness of Audit. The Government has stated that it agrees with the findings of all three reviews. The White Paper sets out the proposals to implement most of their recommendations.

Key highlights

The consultation addresses the findings of each of the above reviews and includes measures in relation to directors, auditors, audit committees and the powers and regulatory remit of the new proposed regulator the Audit, Reporting and Governance Authority (ARGA). The key proposals include those noted below.

  1. Scope of public interest entities

The audits and auditors of Public Interest Entities (PIEs) are currently subject to a number of additional regulatory measures. The consultation looks at options for extending the definition of a PIE to cover the largest private companies and certain AIM companies. This would mean that some of the UK’s largest unlisted companies will be subject to financial reporting regulatory oversight by ARGA. The White Paper include plans to ensure that the any new requirements do not deter companies listing in the UK.

  1. Directors’ accountability for internal controls, dividends and capital maintenance

The White Paper addresses concerns that the current legal and regulatory framework is inadequate in holding directors to account where they neglect their reporting responsibilities. Proposals are set out to introduce new measures covering enhanced internal controls reporting, with views being sought on three options. The preferred option set out would require a directors’ statement about the effectiveness of the internal controls, but would leave the decision on whether the statement should be assured by an external auditor to the directors, audit committee and shareholders. Auditing of the director statement on internal controls in respect of financial reporting is mandatory in the US but concerns have been expressed about imposing such a requirement in the UK, particularly given the cost implications.

There are also proposals for greater transparency in relation to dividends and capital maintenance, by requiring enhanced disclosure and certainty around distributable reserves.

  1. New corporate reporting on resilience, assurance and payment practices

In response to the Brydon Review, views are invited on new reporting requirements for directors of PIEs as follows:

  • An annual Resilience Statement, setting out how directors are assessing the company’s prospects and addressing challenges to its business model over the short, medium and long-term, including risks posed by climate change; and
  • An Audit and Assurance Policy, describing the directors’ approach (over a rolling three year look forward) to seeking internal and external assurance of the information they report to shareholders, including any external assurance planned beyond the scope of the annual statutory audit.
  1. Supervision of corporate reporting

The proposals include:

  • Giving ARGA, the new audit regulator that will replace the FRC, powers to require changes to company reports and accounts without a court order.
  • Increased transparency for corporate reporting reviews, and extending review to the whole of the annual report and accounts.
  1. Company directors

This chapter includes proposals to:

  • give the audit regulator investigation and enforcement powers in relation to wrongdoing by directors of PIEs; and
  • strengthen malus and clawback provisions within executive directors’ remuneration arrangements.
  1. Audit purpose and scope

Considering the recommendations for the reform of audit made by the Brydon review, the proposals include:

  • a new corporate auditing profession to operate independently of the professional accountancy bodies and subject to supervision and enforcement action by ARGA;
  • new overarching principles for auditors, to reinforce good audit practice;
  • a new duty on auditors to take a wider range of information into account in reaching audit judgements, in particular whether financial statements give a “true and fair view”; and
  • perhaps most significantly, new obligations on both auditors and directors relating to the prevention and detection of fraud
  1. Audit Committee oversight and shareholder engagement

In response to the CMA market study, the Government proposes additional requirements for audit committees of FTSE 350 companies in relation to the oversight and appointment of auditors.

The consultation document also proposes to improve investor stewardship by providing enhanced opportunities for shareholders to engage with companies on audit matters. The proposals include:

  • A requirement for companies to publish an audit and assurance policy, which would be subject to an annual shareholder vote.
  • Shareholders to have a formal opportunity to propose to the audit committee areas of emphasis to be considered in the auditor’s annual audit plan.
  1. Competition, choice and resilience in the audit market

Again in response to the CMA market study, the proposed reforms include:

  • A managed shared audit regime for the FTSE 350, with reserved powers for a managed market share cap. The proposals stopped short of mandating joint audits.
  • Operational separation between the audit and non-audit functions of certain firms.
  1. Audit quality and regulation

The White Paper sets out the framework for establishing a strengthened regulator in the form of ARGA.

There will be changes to the regulator’s responsibilities, including a new statutory role in the supervision of accountants and actuaries. The new regulator will also have an enhanced role in the supervision of audit quality.

Next steps

As noted, the White Paper extends to 232 pages. We are reviewing the detail, and will provide analysis of some of the key themes coming out of the proposals and the impact on companies that now or may in the future fall within the regulatory remit of ARGA over the coming weeks. The Government is seeking views on its intended reforms, and consultation responses are requested by 8 July 2021. It could therefore be into 2023 before we see any of these proposals become law.


The length of the White Paper shows that this is a complex area, with the need for change being highlighted across numerous aspects of the audit, reporting and governance landscape.

The Government has been under increasing pressure to strengthen director accountability, improve the quality of audit and make regulation more robust. However, they will also want to be seen to support UK business which is key to the build back better campaign. The proposals reflect its desire to balance competing interests and in particular to not unduly increase the regulatory burden on companies and the cost of compliance.

The White Paper is lacking in detail on the timetable for implementing reform and the Government has already indicated that the Brydon proposal to review reform progress in 2025 is too soon. However, if restoring trust is its aims it will need to have made meaningful progress by then in any event.

Useful Links

Restoring trust in audit and corporate governance

Government webpage

Government press release