IFB Responds to BEIS Corporate Governance Changes
31st May 2022
The Government has today announced changes to the audit and corporate governance regimes, including measures making the largest private companies ‘Public Interest Entities’.
The Government has confirmed it will expand ‘Private Interest Entity’ (PIE) status to large private companies with both 750+ employees and an annual turnover of £750m+, however these ‘sized based PIEs’ will not be required to meet all the same audit requirements as existing PIEs.
The consultation also proposed a UK version of the Sarbanes-Oxley internal control framework. In this response the Government says “in light of consultation responses, the Government believes a more incremental approach to strengthening the UK’s internal control framework would be appropriate.”
Summary of Announcements
Expanding Private Interest Entity Status
- “The Government intends to treat large private companies with both 750+ employees and an annual turnover of £750m+ as public interest entities (PIEs)”
- This is based on a global employee figure
- There will be a smoothing mechanism for companies that drop in and out of eligibility
- Where a UK parent company prepares consolidated accounts for a group, and that group when aggregated meets the size threshold, then the parent company of that group will become a PIE
- The Government will introduce legislation to allow them to amend this threshold by secondary legislation in future
Requirements for ‘Sized-Based PIEs’
- “In line with the Government’s commitment to proportionate regulation, the Government will not require these size-based PIEs to meet all of the same audit requirements as existing PIEs.”
- “The Government does not intend to apply requirements to have an audit committee, to retender the audit every 10 years and to rotate auditor every 20 years to entities that are PIEs because of the new size-based threshold.”
- There will be a ‘generous lead-in time when including new PIEs in ARGA’s regulatory remit.
- Legislation will be introduced to require 750/750 companies to disclose distributable reserves and explain the board’s long-term approach to the amount and timing of shareholder returns, and a statement confirming legality of proposed dividends and any dividends paid in-year.
- For 750/750 companies, Government will introduce a new statutory Resilience Statement and a new statutory Audit and Assurance Policy.
- Government intends to legislate for companies to report on matters that they consider a material challenge to resilience over the short and medium term, together with an explanation of how they have arrived at this judgement of materiality
- “The Government will give ARGA powers to investigate and, if necessary, sanction directors of PIEs for breaches of their corporate reporting and audit-related duties and responsibilities.”
- “The Government will review the existing regulatory framework for PIEs to identify further deregulatory opportunities.”
- “the Government intends to legislate so that Ministers can disapply PIE requirements from particular entities or categories of entities in secondary legislation”
Internal Control Framework
- “In light of consultation responses, the Government believes a more incremental approach to strengthening the UK’s internal control framework would be appropriate.”
- The Corporate Governance Code (for Premium Listed companies) will provide for an explicit directors’ statement about the effectiveness of the company’s internal controls.
- For ‘Sized-Based PIEs’ – Government intends to legislate to require directors to report on action they have undertaken to prevent and detect fraud.
- “Require Public Interest Entities above the size thresholds set out in Chapter 1 to state, as part of the proposed “minimum content” for the new Audit and Assurance Policy, whether or not they plan to seek external assurance of the company’s reporting on internal controls”
Following the publication IFB’s Chief Executive Neil Davy said:
“We are reassured to see the Government has not only heard the concerns from family-owned businesses around their proposals, but has made amendments to the scope and content of the Public Interest Entity expansion to alleviate some of these. The Government has also recognised that a one-size-fits-all approach is not appropriate for all public and private companies, by not extending the same audit requirements to all.
“At a time when businesses are tackling myriad challenges, implementing these new regulations will still take management and Board time away from focusing on growth and job creation, and will disincentivise businesses to grow beyond the threshold. We look forward to working with the Government and the new regulator to ensure the implementation period is workable and proportionate, as well as to highlight opportunities to streamline the complex multiple reporting regimes that now operate.
“Good governance is an important part of a successful business, and we know many large family firms have embraced the development of the Wates Principles to improve their governance in recent years. We hope the Government will support the positive trend reflected in the first year reporting of the Wates Principles and encourage an approach which was designed to embed genuine change.”
For more information, contact Fiona Graham on firstname.lastname@example.org.