Navigating the UK's Audit and Corporate Governance Reforms

UK’s Big Business Reforms After Corporate Collapses

After some big UK companies like Carillion and BHS and Thomas Cook went down and the UK government started working on big changes in how companies are checked and managed. These companies didn’t just go bankrupt, they showed serious problems in how audits were done, how directors acted, and how rules were followed and people started losing trust in financial reports and business honesty.

Because of this the UK suggested a full reform to fix things and The goal is to make audits better and make company bosses more responsible and give more power to rule making bodies and these changes aim to stop future failures and help people trust businesses again and make sure investors workers and the public are not hurt when things go wrong.

This blog explains the key part of these new reforms. It talks about how the change will impact companies, auditors and investors and it also looks at how this will shape company culture and help the UK economy stay strong and safe in the future.

1. Why These Reforms Were Needed: What Went Wrong

Over the last ten years the UK saw some major companies crash and these events showed that something was really broken in how audits were done and how companies were managed. The fall of Carillion and BHS and Thomas Cook caused big money losses for investors and employees and even people with pensions. They also made people question if anyone was really checking if companies were safe and honest.

Carillion (2018)

This was one of the biggest business failures in the UK and Carillion was a big name in construction and services and It had debts of around £7 billion but only had £29 million in real cash and the problem was their financial reports didn’t show how bad things were. KPMG the company that did their audits and didn’t raise alarms and missed big warning signs, This made people doubt if audits were really helping.

BHS (2016)

BHS was a popular retail store but went bust soon after being sold for just £1 and Its pension fund was left with a £571 million hole and thousands of people lost their jobs and The way it was sold and the way directors handled things showed that rules for company sales and audits weren’t strong enough especially when it came to protecting pensions.

Thomas Cook (2019)

The travel company failed because of too much debt and bad choices Even though there were signs it was in trouble and the company kept going until it suddenly collapsed and many travelers were stuck and people started asking if the board of directors really had control and if the auditors did their job in checking the company’s health.

In all these cases auditors didn’t spot or report big financials and management problems  and Directors didn’t act in time or make the right call and these failures made both the public and politicians angry and they pushed for serious changes and that’s why the UK government started making big reforms to bring back trust and improve how audits are done and make sure companies are managed better in the future.

2. Big Reviews That Shaped the Reforms

The UK government didn’t just guess how to fix its audit system it ran three big review led by experts to understand what went wrong and how to make things better.

a. The Kingman Review (2018)

This review led by sir John Kingman looked at how the Financial Reporting Council (FRC) the group in charge of watching over audit was working and the review found that the FRC wasn’t doing a strong enough job and It didn’t have enough power wasn’t fully independent and wasn’t very open about what it did.

What it suggested

• Shut down the FRC and build a stronger and official regulator in its place

• Make sure the regulator is independent from the big accounting firms.

• Give it more power to enforce rules and improve audit quality.

b. The Brydon Review (2019)

Led by sir Donald Brydon and this review asked a big question and What is the real purpose of an audit today? The answer was that audits should do more than just check financial numbers they should help the public trust companies more.

What it suggested:

• Create a new audit profession that is separate from accounting

• Make audits cover more than just finances like how companies manage risk and controls.

• Design a better audit report that’s easier for people to understand

c. The CMA Study (2019)

The Competition and Markets Authority (CMA) studied how the audit market work and It found that a few big firms were dominating the market and that there wasn’t enough competition.

What it suggested:

• Split audit and non-audit services inside firms to avoid conflicts of interest

• Make large companies (like those in the FTSE 350) use two audit firms instead of one

• Keep a closer eye on how audit committees are doing their jobs.

3. ARGA: A Stronger Watchdog for Big Business

One of the biggest changes is creating a whole new regulator called ARGA, the Audit Reporting and Governance Authority and this new body will replace the FRC and will have more power to keep companies honest and accountable

What makes ARGA different:

• More Legal Power -  ARGA can punish company directors if they mess up on financial reporting even if those directors aren’t part of a professional group.

• Wider Role -  It won’t just check audits and ARGA will also look at how companies handle internal risks and publish sustainability reports and stay resilient in tough times.

• Focus on Important Companies -  ARGA will keep a close watch on Public Interest Entities (PIEs) big companies whose failure could hurt the economy or public trust and this includes large private companies not just those on the stock market.

ARGA is meant to rebuild public trust by being stricter more open and more prepared to handle modern challenges in the business world.

4. Reforming Audit Practice and Market Structure

The UK government wants to improve how audits work by making them more independent, fair and competitive especially among large companies.

a. Keeping Audit and Consulting Separate

A big problem is that firms like PwC and Deloitte and EY and KPMG often do both auditing and consulting for the same client and this creates a conflict of interest. Auditors might go easy on companies to protect their consulting business.

To solve this, the CMA (Competition and Markets Authority) called for operational separation and this means that audit and consulting work must be handled by completely different teams within the same firm and the Big Four are already working on meeting this rule by 2024 and so audit work stays objective and independent.

b. Sharing Audits to Boost Competition

Currently, most big UK companies (especially in the FTSE 350) only use the Big Four for audits. To increase competition and help smaller firms grow the government is promoting managed shared audits.

Here, a large audit firm teams up with a smaller one to do the job. This approach helps smaller firms gain experience while still maintaining high-quality audits. Over time this will reduce the UK's heavy reliance on a few big players.

5. Enhancing Corporate Governance and Reporting

Alongside audit changes, the UK is also improving how companies are managed and how they share important information. These updates aim to make businesses more accountable, transparent, and future-ready.

a. Holding Directors Accountable for Internal Controls

Inspired by the U.S. Sarbanes-Oxley Act the UK is planning a rule that requires directors of big companies (called Public Interest Entities or PIEs) to personally confirm that their internal financial controls are working properly.

This will help

• Hold directors accountable

• Prevent financial errors or fraud

• Build investor trust in the company's numbers

Even though it's not as strict as the U.S. law it sends a strong message about responsibility.

b. New Resilience Statements

Big companies will now have to write an annual resilience statement explaining how prepared they are for risks like:

• Supply chain disruptions

• Cybersecurity threats

• Climate change impacts

This replaces older reports and gives a clearer long-term view of the company’s ability to survive and adapt.

c. Audit and Assurance Policy

Every three years, companies must publish an Audit and Assurance Policy. This report will explain:

• What information the company plans to verify

• Who will check it

• How the process will build trust

6. Strengthening Director Accountability

For the first time, directors could face sanctions for breaches of their corporate reporting and audit-related duties, even if they are not part of a professional accountancy body.

New Powers Include:

• Disqualification.

• Financial penalties.

• Public censure.

This is designed to ensure that directors take their governance and reporting responsibilities seriously especially in relation to internal controls and dividend decisions and sustainability disclosures.

7. Implications for Stakeholders

• For Boards and Directors:

  More checks and personal risk means they’ll need to watch things closely and keep better records.

• Board members will have to learn more about how audits and risk work.

• They must make sure reports show the real and long-term condition of the company.

• For Audit Committees:

  There will be more need to be open and take full responsibility.

• Now, they also have to look after things like resilience reports and audit plans.

• Audit groups might need new skills and outside help to do this work right.

• For Auditors:

  They now face new rules on what they should check, how free they must be, and how they see their role.

• Trying to make auditing its own job (not just part of accounting) could mean changes in how they learn and behave.

• Market changes might give chances to smaller firms, but also make the work harder.

• For Investors and Stakeholders:

  They’ll get better info about how strong and safe a company really is.

• There’ll be more checks on controls inside the company and data about environment and social stuff.

• This should help build more trust in what companies say in their reports.

8. Challenges and Criticisms

While the reforms are broadly welcomed and there are notable challenges:

a. Implementation Timeline

Progress has been slower than expected and ARGA and for instance is yet to be fully operational despite being announced in 2018 and Business leaders argue for a pragmatic rollout to avoid disruption.

b. Business Burden

Some companies worry about the cost and complexity of compliance and especially smaller PIEs and critics argue that internal control attestation and new reporting requirements may overburden directors.

c. Market Impact

While intended to diversify the audit market and managed shared audits could raise coordination and liability issues and Big Four firms continue to dominate despite efforts to level the playing field.

d. Scope of Audit

Expanding the audit to cover internal controls and non-financial information could dilute focus and increase expectations beyond what auditors can realistically verify.

9. Looking Ahead: A New Era for Corporate Governance

The UK’s audit and corporate governance reforms show a big step towards making companies more open and responsible and strong and After some big company failures and with people expecting more from business and these changes try to bring back trust in company reports and make rules tighter at all levels.

Some important changes are the setup of a new strong regulator called the Audit, Reporting and Governance Authority (ARGA) and more duties for company directors, and tougher checks on big companies known as Public Interest Entities (PIEs) and Auditors will also have to do more than just look at numbers they’ll also check risks and how companies are run and the full plan is still not done, but the goal is clear and businesses will have to follow higher rules and if they don’t and there will be stronger actions taken and As things keep changing and companies and auditors and rule makers must keep learning and adjusting to help the UK stay a world leader in honest and good business.

Success will depend on:

The quick setup and power of ARGA.

A fair way that helps companies but still protects the public.

Teamwork between government, rule-makers, businesses, and auditors.

In the end all these changes try to win back people’s trust and keep the UK known for being good at running companies and keeping money matters clean and fair.

Conclusion

The UK’s audit and company rule changes aren’t just about fixing past mistakes—they’re about making sure companies are ready for the future. Today’s world is full of fast changes like climate problems, new tech and world issues. This means companies have to deal with many new and tricky risks. To handle this the UK needs company rules that are not just strong and clear but also quick to change when needed.

At the core of these changes is the goal to bring back trust and make companies more responsible and good rules and solid audits help people feel safe when they invest and protect workers and retired people and and keep markets working in the right way and by asking more from directors auditors and boards especially in big important companies these reforms want to make companies stronger and help them plan better for the long run.

Also, the changes show that company's duty now means more than just money. Today its includes the environment, how people are treated and how tech is used. Adding reports on things like sustainability and checking inside company systems shows that the new rules are looking at the full picture.

As these plans grow, it’s super important that everyone, company heads and rule-makers, investors and regular people stay involved. Making a good system for running companies takes teamwork, ongoing talks and being ready to face new problems. With the right effort the UK can become a top country for smart fair and future-ready business.

Our Directors’ Institute - World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out efficiently, helping you make a significant contribution to the board and raise corporate governance standards within the organization.