As the ramifications of new rules governing the definition of Public Interest Entities affected by a tougher regime become clear, ICAEW has flagged issues concerning additional work that may be required by entities brought into scope, the impact on audits provided for these companies and the enhanced regulatory oversight needed.

The BEIS restoring trust in audit and corporate governance consultation follows the 2018 collapse of Carillion and other significant company failures, the three ensuing public reviews and a desire to strengthen audit and corporate reporting. The reforms put forward have the potential to reshape the accountancy profession and fundamentally change working practices across audit and the wider corporate governance system.

The proposals look to extend the current definition of a Public Interest Entity (PIE) - essentially listed companies, banks or insurance companies – to a much larger group. BEIS has suggested several options for bringing large private companies into scope: 

• companies with more than 2,000 employees or a turnover of more than £200m and a balance sheet of more than £2bn, which would bring around 2,000 more entities into the scope of the PIE regime; or,
• companies with more than 500 employees and a turnover of more than £500m – is estimated to affect an additional 1,000 entities. 

Sophie Wales, ICAEW’s Head of Ethics and Economic Crime, said: “The number of affected companies may not sound large, but when you think about all the work that will be required by those entities and the impact both on the audits our members provide and on the regulator to provide oversight, that is pretty huge.”

The new proposals for entities in the PIE regime include a statement by directors on the effectiveness of internal controls, a requirement for directors to report on ‘the steps they have taken to prevent and detect material fraud’ and a new resilience statement to combine and extend existing disclosures in the going concern and viability statements. 

“Any entity that is brought into the PIE definition will face stricter audit independence provisions, including which other services their auditor can provide and there will be additional corporate reporting requirements for those entities,” added Wales. “It’s a lot of work for the entities themselves, it’s additional considerations for their auditors and it brings the audit work into enhanced regulatory oversight.”

Suggestions have also been raised to include AIM companies with a market cap of more than €200m. While the government estimates that would currently affect 105 companies, ICAEW suggests that market capitalisation alone is an unhelpful measure due to the volatility of share prices. 

BEIS is also consulting on whether Lloyds syndicates and large third sector entities including charities, universities and housing associations should also fall under the scope of the new PIE definition, although Wales said there were other ways that the resilience and governance of those entities could be enhanced. 

“We acknowledge there have been high-profile corporate failures and some extra requirements on the largest private companies would probably be appropriate. However, there needs to be careful thought given to what the threshold should be to ensure the extra burden you place on these entities is proportionate to the benefit,” Wales said. 

Wales also warned that it will take time to achieve the government’s desire to increase competition among auditors of PIEs, which has historically been dominated by the Big Four firms. “Part of these proposals is about getting challenger firms outside the Big Four into this market but it will take some time for capacity in the market to respond in terms of recruiting and training staff.”

Read the full consultation document, ‘Restoring trust in audit and corporate governance’

ICAEW wants to ensure members have their say on the upcoming consultation around restoring trust in audit and corporate governance. To do so, please share your thoughts via this feedback form. We cannot guarantee all responses will be incorporated in ICAEW's final submission but they will all be read and considered. The consultation will close on 8 July 2021.

Have your say - audit and corporate governance reform: ICAEW is running two webinars to give members the opportunity to have their say on the proposals, its impact, and the direction of travel. Times and links are below:

• 8:00-9:00 - Wednesday 26 May 2021
  
• 16:00 - 17:00 Thursday 27 May 2021