Audit watchdog to overhaul UK corporate governance code

The UK’s corporate governance code will be overhauled for the first time in four years with new rules to make boards more responsible for fraud and their company’s finances, and strengthen accountability for bad behaviour.

The Financial Reporting Council, which oversees the audit industry, on Tuesday laid out plans to carry out recommendations made by the government earlier this year to reform corporate governance.

The document includes revising existing corporate codes, strengthening auditing and accounting standards, and setting out expectations to drive behavioural change ahead of statutory powers promised under forthcoming legislation.

The beefed up UK corporate governance code is designed to provide a stronger framework for reporting on the effectiveness of internal controls and board responsibilities for expanded sustainability and reporting of environmental, social and governance principles.

There will also be new guidance on fraud reporting by directors, with provisions expected to recommend that certain minimum clawback conditions on pay are included in directors’ remuneration arrangements in the event of corporate failures.

FRC chief executive Sir Jon Thompson said: “These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting.”

Some changes will require primary legislation and the government has indicated that work will begin on a draft for a bill for publication in the next session of parliament. Other measures will be addressed through secondary legislation and changes to existing regulatory measures by the FRC.

Thompson added that “while we await government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve and enhance the UK’s audit and corporate governance framework”.

The FRC also promised to work with government on ways to reduce the non-financial reporting burden on companies.

“We have already been looking at potential opportunities to simplify and improve reporting requirements,” the document said, “whilst making sure the quality of information available to users of corporate reporting including both financial statements and the front half of the annual report is not affected”. 

The FRC, which is also being turned into a more powerful body called the Audit, Reporting and Governance Authority (Arga), is developing minimum standards for audit committees.

Other provisions will ask boards to consider how audit tendering undertaken by the company takes account of the need to expand market diversity given concerns about the powerful position held by the “Big Four” audit firms — Deloitte, EY, KPMG and PwC.

The FRC said it was developing guidance for fraud reporting by directors, audit and assurance policy and capital maintenance and dividends, including distributable profits.