UK audit reform set to cost businesses more than £430m a year

Businesses face hundreds of millions of pounds in extra costs every year under planned reforms of the UK’s audit and corporate governance regime to crack down on fraud and “rewards for failure” among executives.

An analysis of the impact assessment by the Financial Times published alongside the white paper consultation into the proposals found that more than £430m could be added to business costs under the government’s preferred options.

Measures include forcing directors to take on much greater responsibility and liability for company accounts and requiring large businesses to be more transparent about finances. 

The audit market will be reformed through separation of the “Big Four” accounting firms’ audit and consulting arms, and mandated shared audits for large companies with smaller rivals.

Heads have warned of extra costs for those that fall within the new rules, which could be applied over hundreds more companies given plans to expand the definition of a “public interest entity” to cover larger private groups, Aim-listed companies and, potentially, public sector bodies.

The white paper contains various options for key decisions over audit and corporate governance. Officials stress that the estimates are preliminary, with decisions depending on the outcome of the consultation. 

The proposals have also been broadly welcomed by audit executives and business groups. But companies will regardless face extra costs and red tape from the reforms at a time when many are already struggling with cash flow given the impact of the pandemic and the costs of new environmental, social, and corporate governance targets.

Sir Iain Duncan Smith, the former Conservative leader, said that now was not the time to be adding to the financial burdens on companies, many of which were “on their knees” because of Covid-19.

Duncan Smith, who is leading a deregulatory task force for the government, said the true cost was likely to be higher than the official estimate, adding: “At a time when we should be looking to ease the regulatory burden on all parts of the UK economy I would find it difficult to see why we would be adding to the regulatory burden on business.”

Sir Martin Sorrell, chair of marketing group S4 Capital, said there were “significant concerns that these recommendations will discourage entrepreneurial endeavour and success”.

Pointing to recent government efforts to encourage listings in the UK, Sorrell said the reforms “may well encourage such companies to go elsewhere”.

The largest cost would come from extending the number of companies that fall within the proposed rules. Up to 2,000 companies could be brought into scope of the new rules, adding almost £200m a year to business costs. This would fall to £145m if a narrower definition was used.

The other big cost will be in strengthening internal controls within companies to prevent fraud. The government’s preferred option in compliance and new internal financial reporting systems would cost £169m a year.

The reforms follow a series of corporate scandals at companies such as Carillion, BHS and Patisserie Valerie, which have raised doubts over the quality of audit work in the UK and the liability of company directors.

The government wants to encourage competition by forcing larger companies to share audit jobs between a Big Four group and a smaller rival, costing about £23m a year according to the official assessment.

The establishment of the Audit, Reporting and Governance Authority, which will replace the Financial Reporting Council with an expanded scope and scale, would cost £39m per year. 

The body is set to be funded through an industry levy. Using the government’s 10-year assessment period, the operational separation of the Big Four auditors could also cost as much as £22.6m.

The cost of operational separation of the Big Four auditors could cost as much as £22.6m over this 10-year appraisal period.