The Labour Government’s Commitment to Reforming Audit and Corporate Governance

The Labour government has announced its intention to advance the long-awaited reform of audit and corporate governance. This announcement marks a pivotal moment for businesses and the broader financial ecosystem in the UK, with substantial implications for risk assurance professionals.

The Context of Reform

The push for reform has been driven by a series of high-profile corporate failures and scandals that have exposed weaknesses in the current regulatory framework.

The existing Financial Reporting Council (FRC) has been widely criticised for its perceived lack of authority and effectiveness in enforcing compliance and accountability among corporations and their directors.

Introduction of the Audit, Reporting and Governance Authority (ARGA)

Under the new reforms, the FRC will be replaced by the Audit, Reporting and Governance Authority (ARGA).

This new governing body will be endowed with enhanced powers and responsibilities, aimed at strengthening the oversight of companies and the pursuit of directors who fail to meet their obligations.

Key Changes and Their Implications:

1. Enhanced Oversight Powers: ARGA will have greater authority to scrutinise the activities of auditors and companies, ensuring more rigorous adherence to accounting standards and corporate governance practices. This increased oversight will enhance transparency and accountability, restoring confidence among investors and stakeholders.
2. Director Accountability: One of the most notable aspects of the reform is the increased focus on holding company directors accountable for their actions. ARGA will have the power to investigate and impose sanctions on company directors who breach their duties, providing a strong deterrent against corporate misconduct.
3. Improved Reporting Standards: The new authority will also play a crucial role in setting and enforcing higher standards for financial reporting. This will include more comprehensive and timely disclosures, enabling stakeholders to make better-informed decisions.
4. Support for Smaller Firms: Recognising the challenges faced by smaller firms, the reforms will include measures to support these businesses in meeting the new regulatory requirements. This support will be essential in ensuring that smaller companies are not disproportionately burdened by the changes.

Internal Controls Over Financial Reporting (ICFR)

An essential component of the reform is the emphasis on Internal Controls Over Financial Reporting (ICFR). Strengthening ICFR is crucial in preventing financial misstatements and fraud. The new regulatory framework will likely require companies to implement more robust internal control systems, subject to regular evaluation and reporting.

Implications:

• Increased Accountability: Companies will need to ensure their financial reports are accurate and complete, reducing the risk of material misstatements.
• Enhanced Investor Confidence: Strong ICFR frameworks will provide greater assurance to investors about the reliability of financial information.

Implications for Risk Assurance Professionals

For those of us working in risk assurance, these reforms present both challenges and opportunities:

1. Increased Demand for Expertise: The heightened regulatory requirements will drive demand for professionals with expertise in ICFR, ESG, and corporate governance.
2. Enhanced Role in Compliance: Risk assurance professionals will play a critical role in helping companies navigate the new regulatory landscape, ensuring compliance with ARGAs standards and requirements.
3. Opportunities for Innovation: The emphasis on ESG and Net Zero commitments opens avenues for developing innovative risk management and reporting solutions that address these emerging priorities.

So what next?

The Labour government’s pledge to reform audit and corporate governance represents a transformative step for the UK’s business environment. The establishment of the Audit, Reporting and Governance Authority (ARGA) and the focus on ICFR and ESG/Net Zero commitments are set to enhance transparency, accountability, and sustainability across the corporate sector.

For risk assurance professionals, these changes underscore the need to stay ahead of regulatory developments and to provide strategic guidance that supports compliance and promotes long-term corporate resilience.

Companies need to be ahead of the reform and look to implementing these risk and / second-line functions. We are seeing an increase in demand for roles outside of the normal Internal Audit roles and functions.

If you are looking to build or add to your risk function, give us a call. We’ll happily be a sounding board to talk through your options.