Thursday 18 March 2021 6:36 pm

Sarbanes-Oxley-style audit reform 'to cost business more than £430m a year'

Businesses face paying hundreds of millions of pounds more every year under plans to reform the audit sector and crack down on shoddy practices at the UK’s largest firms.

More than £430m could be added to businesses costs as a result of the proposals, according to analyses carried out by the Financial Times.

This morning the Department for Business, Energy and Industrial Strategy (BEIS) published its long-awaited report on audit reform.

The monster consultation contained details on the creation of a new audit regulator, the Audit, Reporting and Governance Authority (ARGA), and laid out plans that should water down Big Four dominance in among the UK’s largest firms.

It also proposed directors of the UK’s biggest companies should be made more accountable if they have been negligent in their duties.

Directors could face fines, suspensions or have to return their bonuses in the event of a company collapse or serious director failings.  

According to the FT, the largest cost to business would come from extending the number of companies that fall within the proposed rules.

Up to 2,000 companies could be brought into scope of the new rules, adding almost £200m a year to business costs. This would fall to £145m if a narrower definition was used.

The other big cost would be in strengthening internal controls within companies to prevent fraud, with the government’s preferred option in compliance and new internal financial reporting systems costing another £169m a year.

Meanwhile the establishment of ARGA would cost a further £39m per year, and tens of millions more would be added by forcing larger companies to share audit jobs between a Big Four group and a smaller rivals.

The consultation will run until 8 July, but no further details were given on when any changes might be legislated.

The audit industry has urged the government to set out a timetable detailing when it plans to implement changes outlined in today’s audit reform consultation so as to mitigate against risk of further delays.

The report was already long-delayed, even recently facing a stop-start situation where the report was supposed to be released about a month ago, but again faced delay.

Mazars head of audit David Herbinet said the next step should be to move forward with the reforms quickly to avoid further delay.

“There will be discussion and debate about the implementation of its recommendations, but we must commend BEIS on coordinating the findings of three broad-ranging and complex inquiries and outlining a productive way forward,” he said.

“We must all now focus upon establishing clarity on timings and the process of implementation to move forward at pace and seize this generational opportunity”. 

John Wood, CEO of the Chartered Institute of Internal Auditors added: “It is disappointing that there is no detailed legislative timetable in the white paper and we need to see a clear roadmap for reform without delay or else we risk further corporate collapses.

“These reforms need to be implemented with urgency to protect and enhance the UK’s enviable reputation for good corporate governance.”

Long-term value outweighs regulatory burden

The proposals on the whole were welcomed by the audit industry. PwC UK chairman and senior partner Kevin Ellis said: “The UK has an opportunity to lead the world on corporate governance. As the country recovers from the pandemic it’s vital that any reform enhances the business environment, making the UK an even more attractive destination for foreign investment and world leading as a capital market.

“This consultation is a crucial step in driving trust and confidence in our reporting and regulatory frameworks.” 

EY UK chair Hywel Ball added: “The introduction of a new regulator alongside tighter accountability for directors as part of a UK equivalent of the US Sarbanes-Oxley framework is essential.

“While reform needs to remain proportionate for businesses in the current challenging environment, the experience in the US shows these changes can build long-term value, improve trust and resilience, and ultimately reduce the cost of capital. This value increase far outweighs the cost of additional regulation.”