Governance reforms - is the timeline delayed?

You may have spotted recent press articles stating that government is reportedly preparing to delay the primary legislation necessary to establish the Audit, Reporting and Governance Authority (ARGA) – the new statutory regulatory proposed to replace the Financial Reporting Council (FRC).

We have been asked by many of our clients what this means for the wider Audit and Corporate Governance reforms and whether it could indicate a delay to the changes to the new Companies Act disclosures or the revisions to the UK Corporate Governance Code (the Code), including a statement of effectiveness for internal controls and risk management systems.

Whilst the reporting of this as a further delay to the wider Audit and Corporate Governance reform proposals is correct, the devil is in the detail. The King’s speech in November 2023 won’t include the Audit Bill, and there will be a general election before the following King’s speech. This uncertainty and potential change in legislative priorities could mean that ARGA may not be up and running until 2026 or 2027.

But what does this mean for companies?

The FRC will remain with its current purview and has signalled an on-going commitment to continuing with the wider regulatory changes to the Code and supporting guidance to the new disclosures in the Companies Act.  The Companies Act changes are secondary legislation (through a statutory instrument) and are completely separate to the news we have received on the delay to primary legislation. We therefore do not expect delays to the proposed changes to the UK Corporate Governance Code (including the statement on the effectiveness of internal controls), nor the proposals to introduce the resilience statement, fraud statement, audit & assurance policy, and the distribution statement into law.

The definition of a Public Interest Entity (‘PIE') is important as it drives the level of statutory reporting, external auditor rotation and the nature of external audit reporting.  We have heard from clients that there is some confusion around the PIE definition and that of a “Large Company” in the new Companies Act proposals (a company with 750 employees and £750m turnover – these are often refer to as the size thresholds). Simply, the PIE definition has not been expanded to include all companies which met the size thresholds, so if an entity does not meet any of the other definitions of a PIE, it will not need to currently apply the same auditor rotation requirements and external audit reporting requirements. However, the company will need to adopt the new reporting requirements in the Companies Act.

So, what does this mean for you?

  1. If you are a company that meets the size” thresholds (750:750 rule) expect to disclose your Audit and Assurance Policy, Resilience statement, Capital maintenance and distribution statements and enhanced fraud statement for periods ending on or after 1 Jan 2025.
  2. If you are currently an unlisted-PIE but below this new size threshold you do not have to follow either the Code or the new disclosures, but you will remain under the remit of the FRC and must continue to comply with your current reporting and audit arrangements
  3. If you adopt the UK Corporate Governance Code or intend to get your Internal Controls over Financial Reporting assured in the future, you should continue to plan for your controls effectiveness statement in annual reports for the periods ending on our after 1 Jan 2025.