FRC confirms overhaul of UK corporate governance code

A “long-awaited” shakeup of the UK corporate governance code will be enacted in a bid to strengthen director accountability for fraud and other misdemeanors, the Financial Reporting Council (FRC) has confirmed.

In a position paper published on Tuesday, the audit regulator outlined its intended actions in five main areas, including changes to codes, standards and guidance, strengthening auditing and accounting standards, and setting expectations for the markets to drive behavioral changes.

Sir Jon Thompson, Financial Reporting Council (FRC) CEO, said: “These long-awaited reforms are a once-in-a-generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting.”

The new paper follows the government’s eagerly anticipated response to a consultation on strengthening the UK’s audit, corporate reporting and corporate governance, published in May.

The most divisive component of the response saw plans to make company directors personally liable for internal controls over financial reporting (considered to mirror the US Sarbanes-Oxley Act) scrapped in favour of a beefed-up corporate governance code. Thompson lamented the omission in a statement made at the time, calling it a “missed opportunity”.

The proposed reforms now require primary legislation to be passed by the government in order for them to become legally binding.

“While we await Government legislation, the FRC is pressing ahead with those changes to standards and codes which will improve and enhance the UK’s audit and corporate governance framework and to lay the groundwork for the creation of ARGA,” Thompson said.

The position paper also sets out the next steps for the FRC’s transition to a new, tougher regulator ARGA – The Audit, Reporting and Governance Authority.

As per the government’s consultation response in May, the new regulator will have the power to:

• Scrutinise the largest private, unlisted companies for the first time;
• penalise company directors who breach their legal duties;
• and ban failing auditors from reviewing the accounts of large companies.

Market reaction

According to Michael Izza, chief executive of the Institute for Chartered Accountants in England and Wales, the FRC is due praise for the timely publication of the new paper, which provides “welcome clarity” on how the regulator will address important issues.

“Making changes to existing codes, standards, and guidance will be a complex process, but it’s vital that we tighten internal controls and modernise corporate governance,” he said.

“We look forward to working with FRC to take this forward, providing our input into the various consultations that will now follow and further strengthening the audit profession.”

Izza also praised the continued momentum of the wider audit reform agenda, urging the next Prime Minister and Cabinet to ensure its continuation.

The Association for Chartered Certified Accountants offered a similarly positive response, arguing that the FRC’s new position paper puts “some meat on the bones of the government’s proposals”.

However, it added that a degree of caution is still required, with clarity still needed in a handful of areas.

“In many cases the devil will be in the detail, and more of that detail will be required so that we know what is planned and when,” said Mike Suffield, the body’s director of policy and insights.

“The government somehow needs to provide certainty of the legislative timetable to give effect to the setting up of ARGA.  This will provide the regulator with the statutory basis that it needs, to set it up for success.”