UK set to scale back corporate governance reforms after business backlash

A proposal to require directors to sign off on companies’ internal controls over financial reporting is expected to be dropped, according to the Financial Times

The UK is set to rein in some of its proposed reforms to corporate governance following warnings from businesses about the costs of the new rules.

The overhaul of audit and corporate governance follows a number of high-profile scandals, including at outsourcer Carillion and retailer BHS.

But some of the most controversial changes will be scaled back after business executives warned that additional costs would make it less attractive to establish and keep businesses in the UK, the Financial Times reported, citing people familiar with the revised proposals.

The government is keen to foster a “business friendly” environment in order to support a post-Brexit economic recovery.

Under the new rules, directors will have to make an annual statement about a company’s effectiveness, but a proposal to require directors to sign off on companies’ internal controls over financial reporting is expected to be dropped, the FT said.

Instead, a similar provision is expected to be included in the UK corporate governance code, which would carry less weight and be more difficult to enforce.

The code applies only to companies with a premium listing, meaning fewer businesses would be included in its scope, the report said.

This would be a blow to accounting firms, which argue that ultimate responsibility for internal reports lies with company management.

The reforms will widen the definition of “public interest entities” (PIEs) to include about 1,000 extra companies, while plans to double the number of PIEs to about 4,000 will be dropped, the FT said.

However, large limited partnerships and private companies, such as the biggest accounting and law firms, would still be included.

Michael Izza, chief executive of chartered accountants body ICAEW, said a failure to strengthen the rules around internal controls would undermine the wider package of audit reforms, the burden of which would instead fall on the accounting profession.

“If any one of the pillars of this reform programme is weakened then the whole package is at risk of falling down,” he told the FT.

The head of one Big Four auditor said: “It feels like you’re the goalkeeper and they’ve not invested in the defence. It leaves you exposed.”

The proposed reforms are subject to change until they are signed off by Business Secretary Kwasi Kwarteng.

The UK business department told the FT that no decisions had been taken.

“Our consultation on audit reform set out a wide range of proposals to restore public trust in the way big businesses are run and scrutinised.”