UK plans to get tough on directors of fraudulent or failing firms

Among the proposals is the separation of audit and consultancy functions at the four largest auditing firms.

British policymakers have criticised a key financial regulator for being too timid in monitoring auditors such as the 'Big Four', PwC, Deloitte, KPMG and EY [File: Reuters]

The United Kingdom is planning to weaken the market grip of the “Big Four” auditors and make company directors responsible for spotting fraud after the collapses of retailer BHS and builder Carillion.

Directors would have to repay bonuses if their company went bust or serious failings came to light, and dividends and bonuses would have to be stopped if firms lacked cash – a lesson from the Carillion collapse.

The long-awaited proposals, published on Thursday and put out to a four-month public consultation, implement the bulk of recommendations made in three government-backed reports on audit market competition, regulation and corporate governance.

“It’s clear from large-scale collapses like Thomas Cook, Carillion and BHS that Britain’s audit regime needs to be modernised with a package of sensible, proportionate reforms,” business minister Kwasi Kwarteng said in a statement.

Some of the proposals are already being introduced in voluntary form, such as operational separation of audit and more lucrative consultancy work at PwC, Deloitte, KPMG and EY – the “Big Four” firms that dominate auditing of blue-chip UK companies.

The Financial Reporting Council, criticised by lawmakers for being too timid in regulating auditors, is already undergoing an internal transformation to become the more powerful Audit, Reporting and Governance Authority (ARGA).

The government proposed that smaller audit firms undertake a meaningful portion of big-company audits, stopping short of insisting on joint audits with larger competitors initially recommended by the UK Competition and Markets Authority.

This change would help “challengers” such as Mazars, Grant Thornton and BDO build up the expertise to fully take on the Big Four later on. If this competition strategy fails, the Big Four face caps on market share, the government said.

Collective vs individual

The government would also introduce new reporting obligations on auditors and directors aimed at detecting and preventing fraud.

Company boards would be required to set out what controls they have in place in a British version of the stringent Sarbanes-Oxley anti-fraud safeguards introduced in the United States after energy giant Enron collapsed in 2001.

ARGA would have powers to investigate and punish all company directors.

The Institute of Directors said it was appropriate to consider how the accountability of directors could be improved, but the collective responsibility of a board should remain the central feature of UK corporate governance.

Accounting experts say such increased responsibilities on directors would mean individuals taking on fewer directorships.

After the consultation ends in July, the government said it would propose legislation when “parliamentary time allows”.

“We urge ministers to get on with implementation as quickly as possible, with the establishment of the new regulator as the top priority,” said Michael Izza, CEO of the ICAEW, a professional accounting body.

Source: Reuters