MHA | Corporate governance reforms on the near horizon

Corporate governance reforms on the near horizon

Posted on: November 25th 2022 · read

Audit and corporate governance reforms were confirmed earlier this year by the Government.

The Financial Reporting Council (FRC) will move towards becoming the new Audit, Reporting and Governance Authority (ARGA), expected to take place in April 2024.

This strategy follows the Government’s proposal to restore trust within corporate governance and audit and will include granting ARGA the ability to raise funding for their regulatory activities through a statutory levy.

Current funding proposals being consulted on include:

  • Accountancy professional bodies should meet the costs of overseeing the performance of ARGA’s regulatory role through an annual levy;
  • Public Interest Entities (PIEs) should finance the cost of ARGA regulative reporting against directors and other areas;
  • Auditors of PIEs should fund regulation by paying an annual levy based on their fee income from PIE audits.

Changes to Public Interest Entities (PIEs)

The threshold to be considered a “Public Interest Entity” (PIE) is also changing which may impact on reporting requirements for companies that will be captured in the new thresholds. The definition will be widened to include large entities of public importance irrespective of if they are trading on a regulated market. The definition of PIE will change from the 500 employees/£500 million thresholds to having both 750 employees and £750 million annual turnover (referred to as ‘750/750 PIEs’).

To minimise the potential strain for entities now appraised as a PIE, the Government intends to institute a tiered approach to reporting. PIEs meeting the 750:750 threshold will not become subject to all existing PIE requirements, but rather new reporting conditions will be introduced that will be applicable primarily to these 750/750 PIEs.

The expanded criteria will include AIM-listed, LLPs and third-sector entities but companies are encouraged to check the new requirements for themselves to check whether they will be caught.

Further Changes to Reporting and Governance

Alongside the move to ARGA, there are many other proposals relating to this area. For the new 750/750 PIEs, a ‘Resilience Statement’ will need to be included in the strategic report and they will need to publish an ‘Audit and Assurance Policy’ (AAP) every three years.

The resilience statement will incorporate existing going concerns and viability provisions in the financial statements and will require companies to discuss how certain risks have been dealt with. The ARGA is to provide supporting guidance on the resilience statement and detail what will be required.

The AAP will describe the company’s approach to obtaining assurance over its reported information. They will also need to publish an annual implementation report regarding how effective their assurance mechanisms have been.

Both the new policy and report will be issued in the same segment as the audit committee report within the financial statements and again, further guidance will follow in due course.

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