FRC chair says more companies should fall within PIE reforms 

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The government announced in May that it would widen the definition of public interest entities (PIEs), bringing around 600 additional private companies into a tighter regulatory system, which currently applies primarily to listed companies. 

An overhaul of corporate governance and auditing in the UK was pushed forward following a series of high-profile corporate collapses such as builder Carillion, travel firm Thomas Cook, cafe chain Patisserie Valerie and retailer BHS, with widespread criticism over the effectiveness of the audit process in preventing fraud and corporate collapse. 

However, the government’s move has been less comprehensive than many of the options set out last year in an official consultation, which could have nearly doubled the number of PIEs to 4,000 companies. While those keen to minimise regulatory burdens have generally welcomed this approach, others have viewed it as a watering down of the anticipated regulatory regime. 

A requirement for directors to sign off on internal controls is generally considered the action most likely to reduce the risk of undetected fraud and sudden, avoidable corporate failure and growing concerns were enough to move Sir Jan du Plessis, chair of the FRC, to pledge to hold company directors to account with his own version of the Sarbanes-Oxley-style proposals (launched in the US following the collapse of Enron). 

FRC backs listed companies 

Speaking at an event for company finance chiefs hosted by recruiter Odgers Berndtson, Du Plessis said that although the changes would “help to build trust that more companies of systemic importance are within the scope of the regulator”, he felt that more private businesses should be included within the regime. 

If the government wants to protect groups such as employees, pensioners and suppliers affected by recent corporate collapses, the PIE rules “should be consistently applied regardless of whether a company of a certain size is publicly quoted or privately held”, he said, claiming that the new definition had been too narrowly defined and risked incentivising large private companies to steer away from public markets. 

Under the government’s plan, private companies with fewer than 750 employees or an annual turnover under £750 million would fall outside the PIE regime, but listed companies of a similar size would be subject to the rules. 

Du Plessis said the decision “has unfortunately created yet another reason why some companies would find the comfort of the private equity world too attractive to resist, exacerbating the significant long-term flow of capital away from public markets”. 

The UK stock market has in recent years seen the value of public companies being taken private significantly outweigh that of businesses floating their shares and Ministers have backed the recommendations of former EU financial services commissioner, Lord Jonathan Hill, and lawyer Mark Austin, who have proposed reducing red tape to boost London’s public markets. 

Shake-up of PIE regime 

The shake-up of the PIE regime is part of a wider planned overhaul of audit and corporate governance rules although it is almost four years since a government-commissioned report recommended replacing the FRC with the Audit, Reporting and Governance Authority (ARGA). 

The focus of the proposals is on Public Interest Entities (PIEs) and directors of PIEs will fall within the jurisdiction of ARGA, which will be empowered to penalise those who act in breach of their legal duties. 

At heart, the reforms were put forward in a bid to restore public trust and confidence in corporate governance and auditing. For its part, the government has emphasised a desire to improve the quality of corporate governance and reduce the possibility of sudden and unexpected corporate failures. 

The government had previously committed to publish a draft Bill this parliamentary session but although Ministers have continued to maintain that pledge for outlining the reforms in the current parliamentary session, which runs until April, they have not said when the new laws would be passed. 

UK Corporate Governance Code 

The FRC is to seek to redress this with a review of the existing UK Corporate Governance Code and in the meantime, is being empowered to ban failing auditors from reviewing the accounts of large companies and FTSE350 companies will be required to conduct part of their audit with a challenger firm. 

Whatever the eventual outcome, to be effective the promotion of strong corporate governance, embedded within the business, needs to encompass much more than what might be identified during an audit – it needs a focus on the approach by which things are done in the first place. 

Whether companies fall within or outside the impending legislation, Bridgehouse believes that good governance and good business practices will, ultimately, create a better and more successful business. 

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