UK rulemakers cautioned over Sarbanes-Oxley style reform model

Plans for an overhaul of audit rules have been met with mixed responses from across the industry, with a number of legal professionals warning that an approach similar to Sarbanes-Oxley – the rules governing audit and corporate finance in the US – could prove ineffective.

The reaction comes as the Department for Business, Energy and Industrial Strategy (BEIS) revealed the proposed changes in a 200-page whitepaper. One of the key sections stipulated that the Audit, Reporting and Governance Authority (Arga) – the body set to replace the FCA – would be awarded the power to bring civil charges against company directors in the most serious cases.

According to Sarah Thomas, partner at law firm Addleshaw Goddard, the US approach of imposing criminal charges would not be welcomed.

“The key difference with these [the proposed “civil route”] proposals is that the burden of proof required is lower, so it will be easier for the regulator to investigate and sanction,” Thomas said in an email.

“In addition, the US experience shows that there have been few criminal prosecutions, whereas there have been more civil cases. This suggests that the civil route may in fact prove more effective.”

Mike Bienenfeld, partner at law firm Linklaters, has called for a similar level of caution over a US-style system, questioning whether it would simply encourage organisations to remain private in order to avoid the reporting obligations.

“Sarbanes-Oxley was effective in many ways, but it undoubtedly had the effect of convincing many companies to either remain private or obtain a listing outside the US.

“In finalising the new reforms, regulators will want to strike the right balance between improving audit processes and accountability, while not incentivising companies to remain private for longer.”

In addition to the new rules on transparency, concerns are growing over the potential cost of the new system.

More than £430m in total could be added to business’ overheads as a result of the reforms, according to an impact assessment analysis conducted by the Financial Times alongside the BEIS whitepaper.

The analysis suggests that the largest costs would come from extending the number of companies that fall within the proposed rules, and bolstering control infrastructure within companies to prevent fraudulent activity.

Linklaters partner Lucy Fergusson echoed these concerns, saying that the new requirements would “no doubt add cost”, and that “companies will want to give careful consideration to them”.

However, EY UK chair Hywel Ball has praised the changes, hailing a UK equivalent of the US framework as “essential”, and suggesting that the accompanying cost to businesses is a necessary by-product.

“The experience in the US shows these changes can build long-term value, improve trust and resilience, and ultimately reduce the cost of capital. It’s important the government maintains momentum on turning these proposals into reality,” he said in an email.

“This value increase far outweighs the cost of additional regulation.”