The article was first published by Accountancy Daily.
On 18 March 2021 HM Government published the White Paper consultation: “Restoring trust in audit and corporate governance” with its consultation period ending on 8 July 2021. Its aim is to reform audit regulation and the audit regulators in the wake of high profile corporate failures such as Carillion.
Company directors should also note that its aim is to reform corporate governance standards too. In particular, it includes new powers of enforcement against all directors of “large public interest entities” (‘PIE’) whenever there is a corporate failure.
So what is a PIE?
The consultation paper proposes 2 options:
1. All companies (already subject to a corporate governance statement in their directors’ report) with either:
(a) more than 2,000 employees; or
(b) a turnover of more than £200 million and a balance sheet of more than £2 billion.
It is estimated that Option 1 would bring approximately 1.960 entities within this definition of a PIE; and
2. A narrower test which would only extend the definition of a PIE to large companies with both:
(a) over 500 employees; and
(b) a turnover of more than £500 million
It is estimated Option 2 would bring approximately 1,060 entities within this narrower definition ie nearly half that of Option 1.
In addition to Options 1 and 2 it is also proposed that the PIE definition will include:
3. All Alternative Investment Market (‘AIM’) companies with a market capitalisation above 200 million euros.
This would bring around 105 AIM companies within scope; and that
4. Listing a private company on a regulated market would automatically entail a company becoming a PIE.
Whilst HM Government is considering whether to allow newly listed companies a temporary exemption from some of the new reporting and attestation requirements for PIEs, it is unlikely that this temporary exemption would also apply to their directors. Instead they should expect to be immediately under the spotlight.
The new enforcement powers that could be applied to directors of PIEs
HM Government’s intention is to extend the current suite of enforcement powers and enforcement agencies of directors of PIEs (whether they are already FCA regulated or not) to include the new audit regulator (Audit, Reporting and Governance Authority (‘ARGA’). This will enable a pooling of resources and a single investigation into an issue at a PIE followed by action against its auditors, accountants and/or directors as appropriate.
The proposed enforcement regime will enable AGRA as this new regulator to take civil enforcement action such as individual bans, fines and public censures against all PIE directors in relation to breaches of existing PIE directors’ duties relating to corporate reporting and audit (and any new duties which are introduced further to this current consultation, for example, internal controls).
This new enforcement regime for PIE directors would not replace existing arrangements for taking action against company directors, for example, in respect of offences under the Companies Act or breaches of the FCA’s Listing Rules, the FCA’s Transparency Rules or Market Abuse Regulation.
Instead HM Government’s intention is for these enforcement powers to work in tandem with those held by the FCA as well as those held by other enforcement agencies including the Serious Fraud Office (‘SFO’).
In doing so, HM Government recognises that the extent of overlapping enforcement powers will be increased against directors of listed companies and financial services firms.
In effect, an enforcement agencies’ tag team will be set up and where it has been decided that it is not appropriate for a case concerning the conduct of a director to be addressed by the FCA or the SFO, instead the ARGA will be able to take action for corporate reporting and audit related failings in relation to PIE directors, including those of listed companies and financial services firms.
With the ARGA’s senior executives to include a former FCA Head of Enforcement who was hired explicitly to “beef up” its enforcement division, all PIE directors should expect increased and more intrusive oversight and expectations of personal accountability, whether they are accountants themselves or not.
In summary, the current consultation is explicit that all PIE directors (including non-executives) should expect no safe harbour. Even if you are not an accountant, you will be subject to the new ARGA’s civil enforcement powers and a possible personal ban, fine and/or public censure. This is consistent with the precedents the FCA have established for all directors of their regulated firms, whether a particular director was expected to be personally responsible for compliance or not.
So, in order to protect yourself against such potential enforcement action, you will need to consider in real time what reasonable steps you yourself have taken and/or are taking to guard against corporate governance and audit failures and to make contemporaneous records as to what you have done (and will do).
Even if you are not an accountant, you will need an “audit trail” to prove that you were asking the right questions at the right time and not simply taking “no” for an answer, either from your fellow directors and/or your PIE’s auditors. Collective responsibility will be no defence rather it will be the starting point for a potential enforcement action if there is a corporate failure.
If you would like to discuss any aspect of the current enforcement regimes and powers in relation to company directors and how they are likely to evolve further, please contact [our FCA, White Collar Defence and Investigations team.