UK version of Sarbanes-Oxley should be introduced

The government is likely to finalise plans for its wide-ranging audit reforms by the end of year with indications they will tighten up the rules on internal control and director accountability

There is also support from investors for a UK version of the Sarbanes-Oxley rules to govern directors. Speaking at the ICAEW conference on reporting and governance, Sir Jon Thompson, head of the Financial Reporting Council (FRC), said: ‘The FRC’s view is that the introduction of a framework to assess internal controls would be very welcome with a UK version of Sarbanes-Oxley, but there will be a cost to that.

‘We are very much in favour of it, but it is clearly a political decision. The biggest single cost to the introduction of the audit and governance reforms is UK SOX rules.

‘We’re very supportive, I can’t say whether it’s coming or not, it’s open to ministers to make the decision.’

Under the framework CEOs and CFOs of publicly listed companies would have to provide a statement on internal controls over financial reporting (ICFR) and any material weaknesses identified.

Under the proposals, directors could face fines or suspensions in the most serious cases failings such as significant errors with accounts, hiding crucial information from auditors, or instances of fraud. There are also plans to curb payouts of dividends and bonuses if the business is facing potential insolvency, with clawbacks of bonuses written into law, with payback up to two years after the pay award is made.

 Another issue raised at the conference was how to improve competition across audit firms to open up the business to non-Big Four audit firms.

‘Our view is that there is no one simple solution. The companies listed on the stock exchange are very varied. We think that the government should give the regulator all the options,’ said Thompson.

‘The general consensus is that there should be a cap on the share of audits – that would be the best option. We also like the idea of managed shared audits. Joint audit would not work in the UK as we would have to overhaul the liability rules.

‘The obligation is on the regulator to see how long it would take to increase competition, but it would take at least seven years,’ he added.

With plans for the overhaul of the audit market likely to become clearer by the end of the year when the government releases its proposals, the FRC is also planning to publish a new framework later this autumn focusing on the role of auditors and what they need to do. It will look at the key attributes of a good audit and how to enact high quality audit practice.

‘The key attributes are split into three groups – risk assessment, how to execute audit field work, oversight, professional scepticism, and  the need to complete and report the audit – 19 aspects will be set out in the framework.

‘Best practice will focus on eight core areas, including monitoring, resource planning, methodology and use of technology.’

Thompson also admitted that the FRC could be more transparent, especially when it comes the annual audit quality inspection reports. ‘We don’t publish our reviews so we could be more transparent,’ he said.

‘There is a need for significant change in a range of areas on reporting and governance.

‘The purpose of the Financial Reporting Council (FRC) is to set high standards in reporting, audit and governance, we are striving to set higher standards and achieve more consistency.

‘On corporate reporting, we assess it through monitoring and do 300 reviews a year, thematic reviews and overall assessments of corporate reporting. Our aim is that disclosures should be sufficient to show the quality of cash flow. In a small number of very extreme cases we have to ask for immediate explanations about reporting issues.’

A number of areas of corporate reporting need improvement, Sir John said, including disclosure of impairment testing, revenue and recognition, and statement of cash flow.

‘We are trying to get the balance right between being a regulator and improving reporting. Investors want more disclosure on risk management in the longer term, they want to understand the key accounting assumptions and for clear and consistent metrics on environmental and climate issues, and comment from auditors in this areas.’

The government has indicated that it will publish the feedback statement in response to the wide-ranging white paper on audit reform, which received over 600 responses, with 130 from companies and investors.

Thompson also said that the UK is unlikely to adopt the proposals for the audit of less complex entities as it stands, but would add a number of supplementaries to moderate the plans for the UK.

'Our view is that it does not really work for the UK; we already have a differentiated accounting system. If it is going to be passed we will need to add some supplementaries. If you think about the international auditing standards, we do not change them, we add supplementaries. The supplementaries clarify and expand on the international standards, which already run to 1,200 pages.'

Croner-i Navigate provides guidance, commentary and tools for corporate governance. See Practical Guide for Audit Committees, our Corporate governance Quick Link and the Companies Secretaries and Directors Guide – Corporate governance for a selection of these resources.

Sara White |Editor, Accountancy Daily

Sara White is editor of Accountancy Daily...

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