Home / Current Affairs / Directors face new liabilities as part of UK audit reform

07
Apr

Hiring a new director inevitably presents a massive risk to a company. Making the wrong choice could put a lasting dent in the trust of the comapny and public reputation. With the Financial Times reporting that the UK government is considering making directors directly responsible for the accuracy of company financial reports, now is not the time to skimp on proper director/directorship screening.

The government is considering adding to director responsibility as a response to recent accounting scandals. If a director is found in breach, they could expose the company to fines or even bans on types of business activity. The FT pointed to the recent examples of accounting troubles at Carillion as a prime example.

Kwasi Kwarteng, business secretary of the UK has published proposals in a white paper. A press release going into more detail is available on the UK government website. The entire paper contains more than 200 pages, and draws parallels to US regulatory response to the Enron accounting scandals. These are commonly known as the “Sarbanes-Oxley rules”.

The regulations and their impact on directors and companies

According to the FT, the proposals would empower regulators and put additional responsibility on the UK’s biggest companies.

However, as companies struggle to emerge from pandemic regulations, negative effects could occur. For example, the regulations may add additional costs at a time when many businesses can little afford it.

The FT quoted an anonymous UK head of audit, who said:

These are big costs for British businesses. The government needs to make sure that there are not so many constraints that it will be too big to do business here.

FT: https://www.ft.com/content/d4dd13a9-903e-4ff7-9fc3-d30ffdf764be

On the other hand, those who support additional regulation argue that these protections are needed. They argue directors hold ultimate responsibility and the government powers are currently unable to enforce that. The FT continued to cite anonymous sources. They stated the proposal is not likely to recommend that the government require the largest companies to employ two auditing firms at once. However, this is despite endorsement from other sides.

Future government action

A government spokesman said the following to the FT:

“Strengthening our corporate governance and audit regime will help to ensure that the UK remains a world leader in corporate transparency and advance its status as a place of the highest standards of audit.”

FT: https://www.ft.com/content/d4dd13a9-903e-4ff7-9fc3-d30ffdf764be

Last July, the Financial Reporting Council announced major regulatory updates scheduled for 2024. They will require the Big Four accounting firms to separate their auditing and consulting units into different businesses. Nonetheless, they can still exist under the same parent corporation


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