British Regulator Moves to Reform Corporate Financial Reporting Standards
After the failures of retailer BHS and builder Carillion, company directors will be required to provide investors with more certainty that annual reports are free of fraud beginning in January 2024, according to Britain's accounting watchdog.
The British government said in May that it would enact legislation to establish a more robust audit and corporate governance authority and alter the hiring process for auditors.
The Financial Reporting Council (FRC) outlined on Tuesday the reforms it will suggest that do not require a new law, such as modifying Britain's "comply or explain" Corporate Governance Code and creating voluntary standards until legislation is passed to make them mandatory.
FRC’s chief executive, Jon Thompson, 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 FRC has announced that beginning in January 2024, the code will be revised so that companies have internal controls to ensure the accuracy of annual reports and other reports.
The shift is the result of Britain's decision not to enact a version of the strict U.S. Sarbanes-Oxley regulations, which require corporate directors to personally swear to the accuracy of their financial accounts or face incarceration for violations.
The FRC will also draft guidelines for directors regarding reporting fraud, distributable earnings, and resilience, which refers to a company's ability to remain in business.
As new disclosure requirements are implemented, the FRC will modify the code to reflect a board's broader duties for sustainability and environmental, social, and governance (ESG) reporting.
To reduce the dominance of EY, KPMG, PwC, and Deloitte, a provision would require companies to consider the need for "diversity" when submitting bids for a new auditor.
According to the FRC, the rules will be revised to tighten reporting when arrangements are triggered to reclaim a bonus.
There will be a pilot examining how companies could report on compensation, a subject that is increasingly under the scrutiny of investors.