With the future of UK corporate governance and audit reform seemingly as murky as ever, businesses are being forced to prepare compliance measures for legislature reform that may never come. Diligent tries to unpick the jargon, and shed some light onto parliamentary proceedings.
According to media reports, the primary legislature needed to enact the Government’s proposed reforms to UK Audit and Corporate Governance will be delayed, meaning that impending reform would be postponed, easing concerns for many organisations who will be considering implementing their own coping mechanisms.
Despite this, secondary legislation on corporate reporting revisions, including resilience statements, anti-fraud measures and audit and assurance policies, is already before parliament. While the consultation on revisions to the UK corporate governance code, which will introduce greater scrutiny of internal controls and requirements for non-financial reporting, is in progress. If both acts are approved, they will will apply from 1 January 2025. Consequently, businesses should continue preparing for compliance.
These contrasting reports create a clear area of concern for firms. Businesses and markets thrive on certainty, which is a commodity that has been fleeting in recent years.
In its absence, companies need to ensure that their governance and reporting is sufficiently effective to guide robust decision-making in turbulent times. Compliance with the Companies Act 2006 and UK Corporate Governance Code are key mechanisms for achieving this. But, when the code itself is undergoing revision, coupled with a significant programme of audit reform which is now facing delays, it might feel as though all bets are off.
This is the scenario businesses now seem to be trepidatiously walking towards, as media reports suggest that the long-awaited primary legislation that will launch the major reforms is likely to be delayed. This has prompted industry heavyweights, including the Chartered Institute of Internal Auditors’ Chief Executive Anne Kiem, to respond, criticising the government for failing to deliver its commitment to reform.
But whilst that change now seems to have been put onto the back burner, there is still mass pandemonium, as business are left in the dark regarding what legislature will eb changing – if any at all.
The Government’s response to the White Paper ‘Restoring trust in Audit and Corporate Governance’, published May 2022, refers to the delivery of reforms by a “variety of mechanisms”, and some of those mechanisms are already at an advanced stage. This means businesses should continue preparations to comply with several key changes to audit and corporate governance code requirements.
The UK Corporate Governance Code revision consultation is under way, having been launched by the FRC in May of this year. Some, but not all, of these changes relate to the parallel amendments to the Companies Act 2006 and the proposed (but now potentially delayed) primary legislation.
The tweaks include setting out a revised framework of prudent and effective controls to provide a stronger basis for reporting on, and evidencing their effectiveness, making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and updating the Code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government’s response to the White Paper.
The consultation closes on 16th September 2023 and, if implemented, the new code will come into effect from 1 January 2025. All these proposals will affect how boards and governance teams undertake corporate reporting and, as such, companies should continue preparing for their implementation.
Fundamentally, the problems that UK Corporate Governance and Audit Reform set out to address should still be priorities for any responsible businesses in today’s environment. Building trust in UK businesses is an important pillar of success and beneficial for all stakeholders in the UK economy.
Political pressures may be preventing the timely introduction of primary legislation, but there is a good sense of momentum across other parts of the business and regulatory spectrum, and we should aim to harness this to move forward with reforms where possible.
Read the full report from Diligent here.
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