In the UK’s Business, Energy and Industrial Strategy select committees’ (BEIS) Future of Audit report, MPs have shown support for stricter regulation of the audit market and an openness towards a UK Sarbanes-Oxley Act-styled regulation.
The Future of Audit report said it welcomes the UK Government’s commitment to consult on the possible introduction of a strengthened framework around internal controls on a similar basis to Sarbanes-Oxley.
It said: “If adapted to the UK regulatory system, a UK equivalent could make a significant contribution to improving the reliability of financial reporting.”
The report noted there was support from a range of stakeholders for the introduction of a UK Sarbanes-Oxley regime, who argued that by placing more responsibility on CEOs and CFOs, it would improve the overall reliability of the eco-reporting system.
It also noted counter arguments to introducing a Sarbanes-Oxley regime in the UK could make management resistant to disclosing weaknesses and mistakes for fear of being sued in the future, and that it might stifle innovation in financial reporting.
The Kingman review said that if a Sarbanes-Oxley system was introduced it could: “Impose significant costs, at least initially, particularly on smaller listed companies. The US experience shows that smaller companies are affected disproportionately and listing could become less attractive. Ongoing, recurring costs, however, are said to be lower.”
However, overall the report said if a UK Sarbanes-Oxley system was ‘introduced carefully and monitored to avoid these unintended consequences, it could contribute to a more robust financial reporting system’.
The report, which is one many that have recently focussed on the UK audit market, also called for a structural breakup of the Big Four, legally dividing audit and non-audit service lines into two distinct entities, building on the Competition and Markets Authority proposal to introduce an organisational split.