Revisions to the UK Corporate Governance Code have been slimmed down, but the measure considered its centrepiece by many governance experts—a declaration by boards on the effectiveness of their internal controls—will remain.

The news came on the same day as the King’s Speech confirmed that an Audit Reform Bill, establishing a new governance watchdog with bolstered powers, would not be in the government’s legislative agenda for the coming year.

In a statement on the governance code, Richard Moriarty, chief executive of the Financial Reporting Council (FRC), says measures to have audit committees report on their monitoring of narrative reporting and sustainability issues are withdrawn.

So too is a proposed new responsibility for audit committee chairs to engage with shareholders. Provisions in the code addressing the risk of “over-boarding” have also been ditched.

Resilience reporting postponed

Other elements of the code have had to go because of the government’s surprise U-turn on regulations introduced in July that would have introduced new reporting responsibilities on risk and resilience, audit and assurance policies, anti-fraud measures and distributable profits. One governance insider told Board Agenda the decision was “interesting, to say the least”.

An FRC statement says that, in reviewing a record 5,000 responses to the code, it has had to weigh its public interest remit against the UK’s “growth and competitiveness”.
Moriarty says that’s why the FRC “will be taking forward a focused number of proposals to strengthen corporate governance outcomes, improve internal controls and reduce reporting burdens and duplication”.

Despite the government’s postponement of the Audit Reform Bill, legislation arguably in development since scrutiny of the sector was renewed after the collapse of Carillion in 2018, the FRC statement says it believes there is “broad stakeholder consensus” that it should continue.

Given the government’s change of heart over new reporting regulations, there had been speculation in the City that the internal controls measures, viewed by many as onerous, would also be discarded.

The policy appears to mirror the US Sarbanes-Oxley (SOX) Act, brought in following the collapse of Enron and WorldCom. Opponents view the UK code as more wide ranging because it potentially asks for declarations not only in financial matters, but also on non-financial controls, such as those for ESG issues.

The FRC, meanwhile, believes SOX to be a “heavier approach”. The US internal controls declaration is mandatory under law, while the UK’s will be framed by the “comply or explain” principle. SOX demands external assurance while the UK code only asks boards to explain how they have “monitored and reviewed the effectiveness” of their controls.

‘Disappointing’

According to Carolyn Clarke, chief executive of Brave, a risk and governance consultancy, dropping the Audit Reform Bill and ESG reporting responsibilities from the code were disappointing decisions.

Clarke adds much work has already been done in many companies on policies that have now been set aside. “We should ensure their work is not lost and is used to drive better governance from within,” she says.

But retention of the internal controls policy was good news. “On a difficult day there was, though, a spark of brighter news from the FRC with confirmation that some improvements to the processes of internal controls will be required in due course, together with clearer guidance for companies.”

There was widespread disappointment with the decision to drop the Audit Reform Bill.

New law is needed to create a new watchdog—the Audit, Reporting and Governance Authority (ARGA)—with new powers. Some other reform measures, including minimum standards for audit committees, are on hold until that happens.

Legislation is also required to introduce “managed shared audit”, another aim of the government, on large company audits.

There had been last-minute pleas from both MPs and members of the Lords , as well as senior auditors to push ahead with a bill and end uncertainty for the sector.

Anne Kiem, chief executive of the Institute of Internal Auditors, says: “It is deeply disappointing that the Audit Reform Bill has been excluded from the King’s Speech. This legislation is urgently needed to put the audit regulator on a statutory footing, with the legal powers it needs to hold company directors and audit firms to account when things go wrong.”

Roger Barker, director of policy at the Institute of Directors, called it a “major omission”.

“It appears that corporate governance is not seen as a vote winner by politicians—despite the wide-ranging impact of the collapses of companies like Carillion and BHS,” he said.

The new governance will be published in January next year. Companies and the audit sector can then see in full what their new responsibilities will be. They are, however, much reduced on what was expected. The debate over whether this is good or bad for the economy will continue.