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UK companies watchdog proposes tougher disclosures on internal controls

London, May 24, 2023

Boards of listed companies face tougher hurdles from January 2025 to show investors they have effective safeguards against fraud to ensure accurate financial reports, Britain's corporate governance watchdog proposed on Wednesday.

Following collapses at retailer BHS and builder Carillion, the government ordered reviews that produced recommendations including stronger internal controls at companies to improve audit quality.

The government rejected calls to introduce a version of the stringent U.S. Sarbanes-Oxley law, which requires company directors to personally attest to the accuracy of financial statements, or risk going to prison for breaches.

Instead, Britain's Corporate Governance Code, a form of "soft" law, is being updated.

Currently boards have to state in annual reports if they have set up effective internal controls.

The Financial Reporting Council (FRC) said on Wednesday its proposals toughen this up to include stating if controls have been kept effective on an ongoing basis during the reporting period, and explain why they reach this conclusion.

"The objective of our proposed approach is to avoid a situation where the review of effectiveness is seen as a one-off exercise," the FRC said.

Other proposals, put out to public consultation, include more emphasis on audit committees at companies to promote effective competition when selecting an auditor - an attempt to dilute the dominance of EY, KPMG, Deloitte and PwC in auditing blue chip companies.

The code is applied to companies with a "premium" listing on a "comply or explain" basis, meaning a company notes compliance or gives reasons if it decides not to.

Britain's financial watchdog has proposed combining the premium and standard listing regimes, meaning far more companies may have to apply the code in future.

The FRC also asks if the code should be changed to reflect the increasing use by companies of artificial intelligence.

The government has agreed to replace the FRC with a new, more powerful Audit, Reporting and Governance Authority, but it has yet to table a draft law to implement this.


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