What the Government’s audit shake-up could mean for your business

Business Secretary, Kwasi Kwarteng, has released a set of proposals which make directors of large companies liable for accounting failures

Business directors could be forced to repay up to two years’ worth of bonuses in the event of financial collapse if they withhold information from auditors.

Under the Government’s proposed rules, this would affect the boards of businesses who have more than 2,000 members of staff or a balance sheet of more than £2bn. Directors of any business with a balance sheet of over £500m and over 500 members of staff would be liable for accounting failures if these plans are put into place.

Significant errors would be met with fines and bonus clawbacks. “Leaving the door open to fraud” could also be punishable.

Regulations that larger unquoted companies would have to adhere to would also increase to bring them in line with more stringent reporting requirements which quoted companies face.

Business Secretary, Kwasi Kwarteng, released the Government consultation today, against warnings that the measures would stifle entrepreneurship and undermine Covid recovery.

Kwarteng claimed that this, among other proposals, would make directors of large companies more accountable for accounting failures, citing the Carillion, Thomas Cook and BHS scandals.

“By restoring trust in our corporate governance regime and encouraging greater transparency, [we] will provide investors with clarity and certainty, cement the UK’s position as the best place in the world to do business, and protect jobs across the country,” he said.

Tory MP Kevin Hollinrake said these measures caused worry within the party: “I am concerned as a company director myself, and I know others feel the same, that it may lead to unintended consequences. I’m interested to see the extent of the responsibility.”

Other proposals in the 232-page white paper include:

  • Replacing the Financial Reporting Council with the stricter Audit, Reporting and Governance Authority
  • The ‘Big Four’ auditors – KPMG, EY, Deloitte and PwC – would be forced to ringfence their audit and advisory firms in order to reduce conflicts of interest. This will give smaller firms the chance to audit a part of a company’s business
  • Expanding audit beyond a company’s financial results, looking at wider performance, such as how they’ve measured up against key climate targets

The consultation is open until July 8 2021 and you can respond here.

Further reading

Critical importance of private company valuations in the post-Covid world

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Anna Jordan

Anna is Senior Reporter, covering topics affecting SMEs such as grant funding, managing employees and the day-to-day running of a business.

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