The UK Government has set out plans to overhaul the UK’s audit market through the creation of a new regulator, greater accountability for big businesses, and action on Big Four dominance.

Following a number of reviews into the UK audit industry, prompted by the high-profile collapse of businesses such as Carillion, which put auditor failings under the public spotlight, the government has pressed on with plans for the UK’s Financial Reporting Council to transition into the more robust Audit, Reporting and Governance Authority (ARGA).

ARGA, funded by a levy on industry, will have stronger enforcement powers. Work on this has already begun, with the UK business secretary Kwasi Kwarteng today (31 May) acting to enable the regulator to ban failing auditors from reviewing large companies’ accounts.

The scope of the regulator has also been expanded as the largest companies, not just those listed on the stock exchange, will now come under the remit of the regulator.

This will see unlisted companies with over 750 employees and with other £750m ($946.17m) annual turnover come under the scope of the regulator. This threshold was set following consultation to ensure reforms are as targeted as possible and minimise unnecessary burdens.

Large businesses will have to be more transparent about their profits and losses – not dishing out dividends while on the brink of collapse – while also providing more information to investors and the public about what they have done to prevent fraud, which company metrics have been independently checked and about the risks their company faces.

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Commenting on the government’s plans, FRC CEO Jon Thompson said: “The FRC welcomes the Government’s response and its commitment to deliver much needed reform.

“It was pleasing to see during the consultation process overwhelming stakeholder support for the creation of ARGA with strengthened powers to ensure investors, employees, pensioners and suppliers are better protected against the consequences of corporate failure.

“The Government’s decision not to pursue the introduction of a version of the Sarbanes-Oxley reporting regime is, the FRC believes a missed opportunity, to improve internal controls in a proportionate, UK-specific manner. We know that well-run companies contribute to a stronger, healthier economy overall.

“While we await the final piece of the legislative jigsaw, the FRC will continue to do all in our power to ensure that audit and corporate reporting standards remain high to ensure better outcomes for stakeholders.”

Big Four Dominance

Under the government’s audit overhaul, FTSE 350 companies will be required to conduct part of their audit with a challenger firm. ARGA will have the power to make big audit firms keep their audit and non-audit functions operationally separate and to enforce a market cap if the state of the market does not improve.

Last week, rumours circulated that EY is planning to split its audit practice from the rest of the business, while a spokesperson for PwC said that the firm had no plans for the business to ‘change course’, though it stands ready to respond to change if it becomes necessary due to changes in the regulatory and competitive environment.